Until a year ago, Donald Peck's world was just the way he likes it to be: busy, but very low profile. But then L&T happened. Almost overnight, the Managing Director of Delhi-based CDC Capital Partners was pitchforked into a corporate battle between L&T and the A.V. Birla group for the control of the former's cement business. And Peck, 51, was the unwitting pawn that L&T's CEO A.M. Naik had employed to stall Birla's bid. Unwilling to let the Birlas get a foot in the door at L&T, Naik had planned a demerger of the cement business and asked CDC to come up with a proposal, where the private equity firm would pick up about 7 per cent, L&T some 70 per cent and retail investors, the rest. The proposal drew the ire of L&T shareholders, forcing Naik to drop it in favour of the Birlas' open offer. It was CDC's first brush with a controversy of this sort.

Then, in July this year, it was once again catapulted into controversy, although for no fault of its own. The issue: disinvestment of the state-owned Punjab Tractors Ltd (PTL), arguably the most efficient manufacturer in the industry. Although a lot of the local tractor companies were in the fray to start with, CDC emerged as the sole bidder when the bids were opened on July 25. A rapturous stockmarket pushed the PTL stock up in anticipation of an open offer until somebody pointed out, correctly, that CDC (being a foreign developmental institution) was not obliged to make one. Therefore, in a matter of two (trading) days the stock fell some 20 per cent, wiping out Rs 200 crore in market cap. And when CDC did announce that it would make an open offer for another 20 per cent of PTL, the Bombay Stock Exchange erroneously published the price as Rs 202 against the correct price of Rs 153. That triggered another frenzied round of buying and selling, where the buyer obviously lost.

Thus, a man, who, for the eight years that he's been in India, had managed to keep one of the country's oldest and most successful (in terms of investment, CDC is the biggest so far this year, followed by Citi and Warburg Pincus) risk capital firms out of the headlines, found himself in the full glare of media. The questions most commonly asked related to CDC's role in l'affaire L&T and the PTL stock surge, and the question that really needed answering went abegging: Just how did a British government-owned developmental institution (it used to be called the Commonwealth Development Corporation) become an aggressive and as-commercial-as-you-can-get private equity firm that not just has the biggest team in India, but is the best performer of all CDC funds in over 50 emerging markets, with an investment of $315 million in some of the fastest-growing companies? This story is an attempt to answer that question.

"Peck is very empowering, quite willing to work with other investors, and can take bets very quickly" Sanjeev Aggarwal, CEO, Daksh

Staying Power

To understand CDC, one has to understand the private equity business. Here, deals are relationship-driven, and it can take years for one to come through. In a good year, a firm may strike only four-to-five big deals, and patience is a big virtue. Therefore, to be successful, a risk capital firm doesn't need a very large team, but it does need one that's on the ball all the time and one that stays with it as long as possible. Not surprisingly, then, a fund's rate of return on investments is only as good as the manager who makes the call.

On all those counts, Peck has been fortunate. Most of his managers have been around with him for the last five years. They have a diverse background, allowing CDC to invest in a range of industries and do different kinds of deals-42 in total. In fact, CDC is the only player to have funded everything from a start-up (like Daksh eServices in 1999) to a mature company like Glenmark Pharmaceuticals, besides participating in disinvestment (PTL). (Schroder Ventures is the only other to have successfully bid for a privatisation deal-of Delhi's Lodi Hotel.)

Although CDC first came to India way back in 1988, for a long time it remained a small player, focused on debt funding in traditional sectors such as textiles and paper. Then, in 1995, Peck arrived in India to set up CDC's venture capital operations. The result was Nandi Investment-CDC's first fund, largely focused on the growing it industry. "We realised that venture capital was the right way to go in a market like India," says Peck.

The $27-million fund focused on small and medium enterprises, investing between $1 and $2 million in each deal. Some of those deals include mro-Tek, Tasty Bite Eatables, and Cico Technologies. While with Nandi CDC was moving into a totally new area, it didn't meet with any significant failures. In fact, in some cases like MRO-Tek it managed to rack up a 500 per cent return on investment. But there was plenty of learning. For one, CDC discovered that equity investment required a significant amount of handholding the promoter. For another, it learnt that staying alert saved it from nasty surprises.

Fairly confident that it had a reasonably solid grip on the risk capital business, CDC in 1998 launched a bigger, $105 million fund, christened the South Asia Regional Fund (SARF). It now looked for bigger deals in the range of $6-7 million. Beginning 2001, it got even more ambitious and upped the bets to $20-30 million. But of late, it has returned to looking for opportunities in medium-sized tech, pharma, and services companies, with investment of $7-8 million. PTL, however, is an exception for more than one reason. It's not just CDC's second-biggest investment ($57 million versus the $60 million invested in BPL Communications), but also the only PSU in its portfolio.

According to Peck, CDC's annual return on investment so far has ranged between 15 and 18 per cent, although this year, he says, "There's been a definite uptick." That's not to say it doesn't have its share of lemons. BPL Communications, for example, is a huge millstone around its neck, and in the past, it has dragged the promoters to court, stalling its proposed merger with Idea Cellular, a Tata-Birla-AT&T combine. Shree Rama Multi-Tech, a manufacturer of laminated tubes and other packaging products is another example. CDC invested about $14 million in the Ahmedabad-based company in 1998, but today it is in dire straits. For quarter ended September 30, 2003, Shree Rama reported Rs 18 crore in revenues and a net loss of Rs 16.5 crore. According to CDC's Director (Assets) N. Srinivasan, the fund has managed to recover about $4 million, but another $10 million is stuck.

That's another thing about the private equity business. You just can't take your eyes off the investee company. And mostly, CDC's deal partners don't. They spend an enormous amount of time on their portfolio companies, helping them strategise, get customers and making some tough decisions. For example, early this year, CDC forced Prashant Prakash, founder-CEO of NetKraft, where it has a $4-million investment, to step aside in favour of Anand Sudarshan, one of the co-founders of Microland. Why? They wanted the company to focus on the next generation of software products, and Sudarshan seemed just the man needed to do that. Says Sudarshan: "What I like about CDC is that it takes a long-term view on investment, is cost-conscious, and doesn't give in to hype."

In His Image

Sudarshan may as well be describing Peck. The man never flies business class on domestic flights unless someone else is paying for it; he knows exactly how much a taxi ride from, say, Mumbai airport to Colaba costs; he mostly doesn't invest in companies that come to him; instead he likes his team to dig out bargains; he's almost never to be found in the capital's party circuits, instead the father of two likes to "play a lot of cricket and tennis" and go trekking on the Himalayas at least once a year; besides he "doesn't spend much time with other experts", relying instead on a few close friends such as N.R. Narayana Murthy of Infosys and Deepak Parekh of HDFC for the occasional advice. Says Sanjeev Aggarwal, CEO, Daksh eServices: "(Peck) is very empowering, quite willing to work with other investors, and can take bets very quickly. In our case, he took just three days to revert with a term sheet (read: agreement)."

But India can be a difficult market to crack, and more so if you are a foreigner. Indeed, Peck admits as much. "When I first came here, people used to say "Here comes a foreigner, let's deal with him differently,' but not anymore." So how did Peck crack the market?

One, by "loosening" up CDC; ties and suits went out, and smart casuals came in. Peck himself dresses so casually that he looks almost like an absent-minded professor, with dishevelled hair and loosely tucked shirt. Two, by sticking to some simple investment mantras. "Investing is about three things: management, management, and management," he declares. Says N. "Subbu" Subramanian of Barings Private Equity: "He is one of the most successful among us."

Peck is in the process of raising another $100 million by June 2004 to fund newer deals. But he's got enough on his plate already. PTL, where CDC now has 28.5 per cent stake, will take a lot of his time. Although it is probably the best managed tractor company, PTL has been affected by poor demand and needs to tap global markets. BPL Communications, where CDC has $60 million stuck, needs a resolution. Of late, there have been rumours that Peck may move out and install director and the PTL deal-maker Steven Enderby as his successor. Peck, however, rubbishes the suggestion. "I enjoy being in India, and doing what I do," he says. It shows.