CX Partners, a Delhi-based private equity firm founded in 2009 by former Citigroup Venture Capital International (CVCI) managing director Ajay Relan, is floating a $500 million (hard cap) India-specific Intermediate Capital Fund, focused on Special Situations, at least two people briefed with the matter told VCCircle.

Ajay Relan, founder and managing partner of CX Partners, confirmed the development to VCCircle, adding that this practice will be run by a separate investment team based in Mumbai. The fund, which is being housed under the CX umbrella, will look at all types of financing, including distressed balance sheets, mezzanine and last-mile financing, for recapitalisations and acquisitions, said the PE veteran. "We have not yet gone to the market to raise money," Relan added in an email to VCCircle.

Incidentally, this initiative suggests a blend of private equity and NBFC model. Mezzanine financing is essentially a hybrid of debt and equity financing, which is typically used to finance the expansion of existing companies.

The new fund will take the total assets under management for CX Partners to north of $1 billion and act as a multi-asset solution provider – catering to all the investment needs of the promoter for both, debt and equity. Often, promoters do not want to fork stake or raise expansive equity for short-term capital-raising plans and in such a scenario, mezzanine-structure financing is a more viable option.

Such initiatives by private equity veterans only hint at private equity firms attempting to evolve into full-service financial firms. In fact, having a debt piece to their asset management piece is a strategy being actively pursued by PE funds. For instance, Kohlberg Kravis Roberts & Co. (KKR), one of the world’s largest private equity firms, has recently started offering debt finance to Indian corporations.

Globally, PE funds like Blackstone Group L.P. and Oaktree Capital Management L.P. do provide debt financing. KKR has reportedly completed four debt transactions worth around Rs 2,800 crore through its non-banking financial company (NBFC) KKR India Financial Services Pvt Ltd, set up in 2009. Late last year, private equity major 3i Group also forayed into debt funding in India and it now plans to lend to Indian tier II and tier III corporate houses. Recently, three PE firms – the private equity arm of Goldman Sachs Group Plc., Everstone Capital and Beacon India Private Equity – set up an NBFC called Indostar Capital Finance Ltd. These three PE firms will also hold a majority stake in Indostar.

The Indian financial sector (excluding the banks) has been through a great deal of regulatory turmoil over the past 18 months, which has changed the shape of the entire sector. If the ban on entry loads was a game-changer for mutual funds in FY10, the change in ULIP guidelines and the ban on universal life products will severely affect the life insurance sector in FY11. In FY12, the NBFCs are facing some restrictive regulations from the RBI, some of which have actually been implemented and others may be implemented in future. The stock prices of all publicly listed NBFCs have suffered badly amid this regulatory upheaval. Therefore, not floating a strict NBFC but a more mezzanine kind of practice ensures more independence and it is not necessarily restricted by the RBI guidelines.

CX Partners currently manages around $515 million under private equity. Key investors in the firm include Morgan Creek Capital, Goldman Sachs, JP Morgan, Asia Alternatives and Adams Street. Its key investments include buying 8 per cent stake in steel company Monnet Ispat for Rs 150 crore from the secondary market, acquiring 20 per cent stake in NTL Electronics India Ltd for Rs 120 crore and around Rs 188 crore in Thyrocare Technologies for the acquisition of 30 per cent stake.

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