Aureos Capital, an emerging markets private equity fund manager focused on the SME space, has started raising its second fund which will invest in India and also operate in Sri Lanka and Bangladesh. Aureos India Fund II is targeting $200 million and will be a successor to Aureos South Asia Fund, which had already raised around $200 million, a top official told VCCircle.

“The new fund will focus on investing in Tier II and Tier III cities in India. Aureos India Fund II will have the ability to invest up to 15 per cent in Sri Lanka and Bangladesh,” said Balaji Srinivas, managing partner of Aureos India Advisers Pvt Ltd. The London-headquartered firm has started discussions with its existing investors, which include players like the CDC Group and the Asian Development Bank.

Aureos, which has recently invested in Chennai-based publishing services provider Newgen Knowledge Works Pvt Ltd, has nearly finished investing from its fund and plans to close one more deal in the next three to six months. It has completed two full exits in Paras Pharmaceuticals (which was acquired by Reckitt Beckinser) and contract research firm Accutest Research Laboratories (acquired by Greater Pacific Capital). The company has also made a partial exit in Continental Warehousing Corporation (Nhava Sheva) Ltd, selling its shares to private equity major Warburg Pincus.

Its first fund has also invested in Ordyn Technologies (communications equipment firm), HHV Solar Technologies (electric utilities), Auro Mira Energy (renewable energy), BSR Super Speciality Hospitals (healthcare services) and Hindustan Vacuum Glass Ltd. (construction & engineering).

Focus On Tier II & Tier III Cities

The competition for deals in the mid-market space remains strong among the Indian PE firms. According to VCCedge, the financial research arm of VCCircle, CY2010 had witnessed $8.05 billion of capital invested across 369 deals. But as the PE deal volume continues to be dominated by growth capital investments, the median transaction size was $10 million during the year. Some firms, like Aureos, have also started looking beyond top metros for deals.

“Healthcare has been one of our focus areas. Therefore, we were looking at healthcare space for a while and also looking at Tier II and Tier III cities. Healthcare services in major metros have their own set of challenges like large capex requirements and increasing competition,” said Srinivas. So, last year, Aureos invested in central India-based BSR Super Speciality, which owns a hospital in Bhilai and a cancer facility in Chhattisgarh, in addition to several diagnostic centres.

“In the small-to-mid-market space where we are operating, there are lots of funds which are currently in fundraising mode and the competition for transactions in this space will increase in the next few years,” said Srinivas, who has worked in the PE/VC space for 14-15 years and worked with funds like Carlyle and Intel Capital.

According to Preqin, a PE research firm, some 120 PE funds seeking to raise approximately $34 billion in 2011 are currently on the road in India. Some mid-market-focused PE firms currently on the road include Frontline’s $150 million Clove Route Fund, Zephyr Peacock’s $150 million third fund, Blue River Capital’s second fund and VenturEast Life Fund.

Ops In Sri Lanka, Bangladesh

Aureos has also said that markets like Sri Lanka and Bangladesh offer interesting opportunities for the fund, as they can develop strong links with India and competition for deals is relatively lower in these markets.

Aureos Capital has invested around 15 per cent of the corpus from the first fund in other South Asian markets like Sri Lanka and Bangladesh. For instance, it has backed Bangladesh’s STS Holdings Ltd, which owns the Apollo Hospitals in Dhaka. The company is now going for an IPO.

It has also made four investments and three exits in Sri Lanka, one of which came in 2009 when it sold 13 per cent stake in the country’s trading software company MillenniumIT to the London Stock Exchange Group.

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