He has the knack of inadvertently choosing the worst time for fund raising. And this happens to be his second fund raising stint in a not-so-friendly climate. After raising $500 million for his maiden fund, CX Partners, in the post-Lehman world, Ajay Relan is now on the road to raise $400-500 million for a mezzanine, special situation fund. For one of the most successful private equity investors in India who was at the helm of the India operations of Citibank?s private equity arm CVC International (CVCI) from 1995 to mid-2008, ?bad timing is not by design, it just so happens?. As we catch up over coffee at his Defence Colony office in the capital, Relan recalls how for CX Partners, ?It was a big, long fund raise.?

?We left CVCI in July 2008 and by September the world was a different place,? he said. Institutional investors who offered to back Relan if he were to spin off to form his own fund ?simply melted away?. And the aye-nay ratio was an alarming 1:10! ?Our backers melted because their portfolios were suffering, they didn?t have the cash to pump in. But we just kept running along, making mistakes, yet learning.? After having managed $1.5 billion out of the $4 billion CVCI portfolio and investing approximately in 40 Indian companies, including stellar investments in i-flex, IVRCL, Suzlon and Sasken, a billion dollar fund seemed natural. But Relan was forced to clip his wings. ?We had no clue what the investors were wanting from a first time fund aspiring to raise a billion dollars amidst a global slowdown.? And subsequently targets were reset, first at $750 million, which finally settled at $500 million. ?By March 31, 2009, we got our first close, which was not bad given that it was the peak of the global financial crisis.? CX Partners made its final close at $515 million in May 2010. Given that the going was not smooth, Relan is candid, ?There were good chances of us failing. I would then probably have had to go back to working for another firm?. In fact, Relan was approached by a ?very big firm? to head their operations while he was grappling with raising money in an extremely difficult environment. ?I was never tempted into it. It would?ve been the last resort.? In retrospect it worked out well, he said. ?Even investing $500 million is not an easy task.?

As we sip the now almost-cold coffee, one question regarding the intriguing yet chic-sounding name CX is due. Relan quickly answers he wanted something catchy, that people could remember and smile about. ?CX is essentially Citi Ex. We couldn?t have used Citi Ex Partners so we used CX Partners?it was symbolic. It was in the deep recesses of my mind. When I was at the Indian Institute of Management, Ahmedabad, we had a case study wherein Pepsi was to launch 7UP and it failed the first time. But the second time, Pepsi branded it as the ?un-cola drink?, effectively positioning 7UP against Pepsi cola. ?When you position yourself against a big brand, the brand rubs off on you.? Also, four out of the five senior partners are from Citi, so the brand association would be retained. So, is CX positioning itself against CVCI? Relan is prompt, ?I always believed that it is not one versus the other because there are more than 250 PE funds in India, and you just want to be one of the best. And that?s where CX is. And we look upon Citi with as much respect as any other firm in the business. It?s not Coke versus Pepsi.?

Doing his own thing was always on Relan?s radar. ?The spirit really roams free when you are an entrepreneur. When you are a part of large organisations, there is a part of you, your soul, which is imprisoned and that gets released almost into a paradisaical nirvana when you do your own thing. And it?s not just about being your boss, it?s about writing your own destiny. Just like an artist, having a clean canvas and being able to paint what you want to paint on it.? CX Partners made its debut investment of $33.74 million in Monnet Ispat & Energy Ltd, a Chhattisgarh-based iron manufacturer, followed by a $25.71 million investment in electrical components & equipment company NTL Electronics India Ltd, $30 million in Matrix Cellular, a mobile calling card service provider, $20 million in Cocoberry, a frozen yogurt chain and in medical diagnostics firm Thyrocare Technologies. And more investments are lined up, primarily in consumer businesses. In all, CX has invested $160 million so far, and still has 2/3rd of the fund to invest.

But, with a string of PE honchos spinning off to start their own funds, what does it mean for LPs? Relan shares that investors are cognisant of the risks, not just investing with large organisations where fund managers are ?just employees?. But they are also cognisant of people like Relan, who have teams made up of independent fund managers who may become fissiparous and break away. ?The risks of people not working together?whether in independent organisations or in launch companies?has always been a risk that LPs have to take. That?s why LPs have risk clauses inserted in their agreements with GPs.? Relan adds that the PE industry, which really took off in India around 2001, has reached its inflection point. ?In 2000, there were not enough people with adequate experience who could have spun off and got LP backing.? But Relan predicts that now the new fad will be teams spinning off from the independents.

As I quiz Relan about the kind of returns India is generating as compared to China, he confesses to being a shade disappointed with PE returns in India. ?The environment has become very competitive, margins are compressed, and this has led to lacklustre growth, which is partly responsible for low Internal Rates of Return (IRRs). Also, in India, there is no arbitrage between private valuations and public valuations. Often, private valuations have been as high as public valuations or even higher whereas in China, there is a big gap between private valuations and public valuations and public valuations are much higher than entry verticals of private companies.? Relan adds that India seems to falter more quickly than China in growth. ?There is a certain price you pay for being a democracy, which we happily pay,? he quips.

Nevertheless, Relan is happy with the way the PE industry has evolved in India. ?It?s heartening to see that PE is a big industry today and billions of dollars are waiting to come to India. The key challenge now is to deliver the kinds of returns that India promises to deliver. It?s sometimes the gap between reality and expectations that may slow the growth of the industry but otherwise, India is on the right track.? As we sign off, I ask Relan if he fears what the new fund raise will be like given the impending slowdown. ?I don?t think fear is an emotion that I suffer from, and I say that in all humility. Simply because we live in a world which will have ups and downs. And the tougher it gets, it becomes more challenging and fun to navigate.?