Avendus Private Equity Investment Advisors Pvt Ltd, the private equity arm of the leading investment bank Avendus Capital, has closed its  second private equity fund at Rs 200 crore (under $50 million), a top official told VCCircle in an interview. The capital has been raised from domestic HNIs in a time frame of six months. Avendus Capital is the sole sponsor of the fund.

The PE firm invests only in public listed companies and "adopts a private equity approach to invest in public equities", according to Manoj Thakur, CEO, Avendus PE Investment Advisors Pvt. Ltd, the alternate asset management firm which he helped establish in 2008. It will deploy capital through secondary market instruments in 10-12 under-researched small cap and mid cap listed companies with market capitalization of less than $500M, which is a strategy that has increasingly gained momentum among seasoned investors.

Former Warbur Pincus managing director in India Pulak Prasad launched a similar fund - Nalanda Capital - in 2006 with a mandate of investing only in listed companies in India. Also recently, the four managing directors of Sequoia Capital India - Sumir Chadha, KP Balaraj, Sandeep Singhal and SK Jain - left the firm to float a public markets fund under the banner of Westbridge Capital Partners, an entity they were originally part of.  

"Returns from investing in listed equities are found to be significantly higher," said Thakur. Investing in small mid -market listed equities provides attractive entry valuations and easier exits that public markets offer in India, he added. 

The asset management firm which has already invested in 6 companies from its first and second fund, said that their portfolio has delivered much higher IRR than the market peers. Their portfolio includes companies like Camlin India Pvt Ltd, a leading stationery maker, and TTK Prestige Pvt Ltd, a leading kitchen appliances company. "These companies are cash flow positive companies, they have completed their capex cycles," says Thakur on the investment criterion. 

While the first fund - whose size is not known while earlier media reports put it at Rs 100 crore - was more of a proof of concept, which apparently turned out to be "extremely rewarding" to the firm and its clients, who were mainly domestic high networth individuals, according to Thakur.

Avendus PE has till now raised money only from domestic ultra high networth individuals. While the fund is completely constituted with retail commitments, the experience of handling retail HNI clients has been fairly good.

"It has proven to be a fairly stable source of capital," Thakur added. The minimum investor retail commitment towards the fund has been Rs 1 crore. The fund follows the typical 2:20 fee structure- (2 per cent as fund administration charges and 20 per cent of carried interest or profits shared among the firm and its partners).

Due Diligence Like Typical PE

Whilst the PE fund makes investment in listed equities, what justifies drawing the standard private equity industry management fee is its private equity approach. "We do a heavy due diligence like any other PE deal. We talk to the competition, distributors, check the track record of the management, study the sector top down etc," says Thakur.

Of the 3,000 regularly traded companies in India, more than 2,700 are small caps and mid caps with a market capitalization of less than $500 million. Only the top 250 companies have high quality equity research coverage and many are relatively unknown to most institutional investors.

"A detailed multi-stage evaluation process involving thorough diligence (meetings with management, customers, suppliers, competitors and industry experts) and business and financial analysis helps unearth strong companies that have the potential to deliver attractive returns over a 3 year period", explains Thakur, who is assisted by a team of four members in due diligence and evaluation of the deals.

The asset management firm is currently bullish on the consumer space, equipment manufacturing sector, and the agri space.  

The asset management firm will raise a fund every year. It will target a corpus of $100 million (Rs 450 crore) for its third fund by the end of this year - which will be a mix of domestic and international capital. From the third fund, it will invest in firms in the market cap range of Rs 5,000 crore. 

Finding good deals in private markets at that size is a problem, and public markets probably offer the ability to do mega deals as the companies are larger with visibility on liquidity. At the same time, listed companies arguably come with better corporate governance transparency.

"We are approaching this progressively and should have about $1 billion of assets under management in foreseeable future," Thakur said.

Apart from challenges in finding good deals, valuations have been a very big issue as India has always been an expensive market. Unlike other markets, where public market valuations are higher than private equities, the latter has always been at a premium in India, making the entry valuations into the companies for PE funds higher.

Prior to starting Avendus PE, Thakur managed Canadian pension fund CDPQ's direct investment portfolio for Asia Pacific, and also served as Head of M&A at A.S. Watson (the $11B retail business subsidiary of Hutchison Whampoa), and led investments for GE Asia Pacific Capital Technology Fund for the Asia Pacific region.

He has also made media investments in India including UTV and ENIL (Radio Mirchi) and served on the Boards of UTV and ENIL for several years.

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