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When shadow bank Infrastructure Leasing & Financial Services Ltd (IL&FS) went belly up in August-September of 2018, sending shockwaves through India’s financial system, the IL&FS Financial Centre in Mumbai’s Bandra Kurla Complex commercial district witnessed a flurry of activity. There were raids by law enforcement. The high profile management personnel of the company were arrested from there.Watching the saga unfold, with a ringside view from an office in the same building were executives at Avendus Capital, a homegrown investment bank that has been an unlikely success story over the last 20 years, forging deals mainly in the digital and tech sectors.For Avendus, the IL&FS default and the ensuing chaos in the country’s financial services sector came at a bad time. Having spent 17 years growing into one of India’s preferred investment bankers, it had decided to become a more broadbased financial services firm in 2017, taking $300 million from KKR, the bulgebracket US-based private equity firm. Avendus Finance, a subsidiary launched in 2016, had become India’s fourth largest shadow bank in structured credit in a year. Defaults by Altico and housing finance company DHFL followed. It had become clear to Avendus executives, pretty early, that they had launched their diversification bid into a perfect storm. They had spent a year and a half furiously building businesses in alternative asset management and lending. Now it became a company plying new business in a market buffeted by strong, unpredictable winds.Within days of the default by IL&FS, the top brass of Avendus set up a war room in one of the conference halls of their sixth-floor office. The top 11 executives of the firm, including the three founders, met almost every alternate day, for the next five months, monitoring risks closely. The team went through every investment made by the firm and its subsidiaries, all investments on behalf of its clients and debt instruments it had its cash parked in, for possible asset-liability mismatch. Tough questions were asked and employees pitching an investment on the strength of the credit rating of the debt instrument found themselves one misstep away from getting fired, says Ranu Vohra, founder, MD and CEO. Investment decisions needed to be backed with fundamental research.
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There was a lot at stake for Avendus in the last 18 months, especially the KKR-backed expansion that mandated building credit solutions as an offering. As Avendus grew bigger, to keep pace with its clients, it had to be able to offer credit on the balance sheet, or eventually lose out to bigger investment banks that could do so. Missteps in lending or choosing assets to invest in would not only have affected the NBFC and the wealth management businesses, but also derailed the growth of the core investment banking business.Digital darlingsVohra and co-founders Gaurav Deepak and Kaushal Aggarwal, (all IITians — Vohra and Aggarwal from Delhi, Deepak from Kanpur) have come a long way since they started Avendus in their late twenties, in 1999-2000. After KKR and Gaja Capital jointly invested Rs 980 crore in 2016-17, Avendus launched its asset management in alternative funds and lending and structured finance businesses. By mid-2018, it was already managing $1 billion worth of funds in its alternate asset management business, had a loan book that exceeded Rs 600 crore, and had been syndicating structured credit for client companies for sometime, with a Rs 135-crore structured credit fund of its own. The wealth management business was handling $3 billion worth of assets from 600 clients. All these portended a great beginning for its diversification, and Avendus needed to risk-proof the plan.
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Growing up with KKRVohra recalls the days when the final decisions of setting up Avendus was being taken. He was 29, while his co-founders were both 26 years old. Much of the final discussions happened over telephone from a houseboat in the backwaters of Kerala, Vohra recalls. He was on a holiday, and his daughter was barely 6 months old. They started an advisory company called Cool Startups in December 1999. That also turned out to have been launched into a perfect storm. Within months of the launch of a new company meant to advise startups, the dot-com boom went bust. By mid-2000, the founders relaunched the company as Avendus, an investment bank specialising in helping software exporters and business process outsourcing companies. The founders picked the name Avendus because in the unsure early days, with already one pivot under its belt, the company wanted a name that could stay even if it had to pivot again. Cool Startups couldn’t, after all, have been an investment bank if it hoped to be taken seriously.After a slow start, Avendus made hay when the second wave of digital tech hit India. Between 2007 and now, it has successfully worked on 138 merger and acquisition deals and 183 deals for private equity investments. It is usually among the top five dealmakers of the country by the sheer number of deals. Till mid-2016, almost 90% of Avendus’ dealmaking were for digital, IT and tech companies. MNC bankers who spoke to ET Magazine conceded they found it tough competing with Avendus when it came to investment banking mandates from Indian digital tech companies.
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The government assignment to sell Satyam Computers in 2009, which saw a joint mandate with Goldman Sachs, was one of the key turning points for the company. It was like a free brand building exercise, says Amit Singh, the investment banking chief of Avendus.The firm also dabbled in the IPOs and capital markets for a while before selling the business. Vohra recalls how he tried to take Vijay Shekhar Sharma’s One97 Communication (Paytm) public in 2009, with little success.However, over the years it worked the deal streets for marquee startup names such as Delhivery, Swiggy or Lenskart, constantly breaking new ground. One of the biggest contributions of Avendus was to introduce unconventional investors to Indian companies. For instance, in 2007 it got US-based technology hardware company Nuance Communication to buy an Indian medical transcription firm. In 2011, Serco, a British outsourcing firm that managed toll bridges and prisons for the government, acquired Indian services provider Intelenet. Again in 2018, Arrow Electronics, a distributor for Qualcomm, acquired Ahmedabad-based chip designer e-Infochips. It also did some complex deals. In 2018-19, Avendus oversaw the merger of listed entity KPIT with the unlisted Birlasoft, followed by a demerger of the engineering and software businesses. The deal saw KPIT promoters retaining their engineering business, while the CK Birla group’s Birlasoft took over KPIT’s software business and also got listed in the process.
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By the time KKR invested in Avendus for the first time in 2015-16, Avendus had already diversified into wealth management. Vohra explains the philosophy behind the diversifications: “We are guided by our clients’ needs. As the digital tech entrepreneurs grew rich, they needed someone to manage their wealth.” KKR along with Gaja Capital did a second round of investment in 2017. Together they now own over 72% of the company, with KKR owning more than 64%.In many ways, the diversifications replicated what KKR had built in India, but at a smaller scale–private equity, structured finance, asset management and lending. Analyst and market watcher Sudip Bandyopadhyay says, “It seems KKR wanted Avendus to do for the mid-market companies what KKR does for larger clients.”It was all smooth sailing until bad times and a credit and liquidity crisis hit the Indian markets after IL&FS’ default. Principal investor KKR itself hit a rough patch, with quite a few of its lending bets through its NBFC arm running into major difficulties. In response to queries, a KKR spokesperson told ET Magazine that it would remain a financial investor in Avendus and would like to see the firm leverage technology and expand its bespoke asset management business. “This was an investment we made early on in their journey, impressed by their entrepreneurial legacy and a passion for doing things right,” he added.
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Lasting legacyDoing it right, Vohra explains, is something that can change over the years. “It’s like running a marathon alongside an entrepreneur, and assisting him in whatever he needs,” he says. He adds that a marathon runner has to pace himself, slow down if needed. That is what the company did last year. Vohra says that the founders had an endgame in mind, possibly selling the company at some stage, when they started out. “Today, there is no endgame,” he adds. The goal is to build an institution that can carry on beyond the founders. While KKR holds a majority stake in the company today, there are optionally convertible debentures held by the three founders that allow them to increase their stake if need be. Co-founder Kaushal Aggarwal says he finds all the talk around the three founders an anathema to what the vision for Avendus is. “This is not about us anymore,” he adds. Recently at an induction programme for new joinees, Aggarwal said that he would like to see one of them leading Avendus in five years. Expansion into new areas has seen infusion of outside talent in the top management rungs.
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For its alternative asset management business, Avendus got veteran fund manager Andrew Holland and his team to move from Ashok Wadhwa-led Ambit. It was a successful move — Avendus now leads the narrow field of Indian hedge funds with $1.4 billion under management. Avendus’ private equity joint venture Zodius has also folded into it and is set to launch a new PE fund. The wealth management portfolio has today grown to $3.9 billion.While the wealth management business leader George Mitra is on his way out, Avendus has been able to attract Nitin Singh, the wealth management head for India at Standard Chartered, to come over and lead the business at Avendus. Sandeep Thapliyal, a veteran of Citibank and RBL, heads the lending business at Avendus.With risks contained, some of the engines are picking up pace. The loan book managed by Thapliyal grew from Rs 608 crore on March 31, 2018 to Rs 871 crore a year later. Thapliyal says he is now prepared for rapid growth and see the book crossing Rs 1,600 crore by March 31, 2020. The alternative asset management portfolio, led by Holland, has gone from $1 billion in mid-2018 to $1.4 billion today. It has a stated goal of touching $3 billion by 2021. Avendus says its consolidated revenue has grown at 50% CAGR from FY16 to FY19, clocking Rs 618.5 crore in FY19 and its profits grew 70% CAGR in the same period to Rs 130 crore.There’s much in the numbers that can please Avendus investors, but for the management, it’s a race, till they can hand over the baton.
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