Dubai-based alternative investment firm Evolvence Capital has announced the launch of Evolvence India Fund II, its second India focused private equity fund of funds, targeting a corpus of $400 million to be raised from institutional and global high net worth clients.

The fund will make select investments in the mid-market growth capital segment in the Indian private equity market, through fund investments, co-investments and direct investments, it said in a statement. 

This new fund from Evolvence Capital follows the closing of Evolvence India Fund I in 2007. Evolvence Capital has significant exposure to the Indian private equity industry through its fund I where it made $250 million of commitments, deployed across 10 funds and eight co-investments/direct investments.

It is a UAE-based alternative investment firm with over $1 billion of assets under management.  Its investment focus is on emerging markets, specifically the GCC region and India. In addition to the Evolvence India Fund, it manages a number of investment funds, including the Evolvence MENA Hedge Fund (a hedge fund targeting the MENA region) and Evolvence Education Holding (a fund focused on investing and developing schools in the MENA region).

The fund of funds will begin fund raising after its internal LP conference in November, Ajit Kumar, MD, Evolvence India told VCCircle.  Kumar added that they will look at tapping their existing set of institutional investors comprising of institutional investors in the Middle East & Europe and also a few pension funds.

Kumar agreed that it is a challenging fund raising environment where LPs are asking for more favourable terms on the economics of the fund.  “The fund of funds model has taken a beating after the turn of events in the hedge fund industry. But we have structured the economics in such a way that it is not a burden to our investors and gets them maximum returns”, Kumar added.

Investment Strategy

From the latest fund, it will look at allocating 50% to fund–of–funds kind of investments and the remaining for direct and co-investment opportunities. It has exposure to firms who have survived at least two cycles of investments like India Value Fund, New York Life Investment Management India Fund, IDFC Private Equity Fund and Ascent India Fund (formerly UTI Ventures), while select direct investments such as Consolidated Construction Consortium Limited, Zylog Systems and Centurion Bank of Punjab. UTI Ventures has also invested in Consolidated Construction Consortium Limited, Zylog Systems.

From the latest fund, Kumar, however, added that they can also look at first time fund managers as he thinks “first time funds perform their best in their first three years of operation and deliver good returns”.  Kumar added that they have in the past committed capital to first time asset managers like JM Financial and HDFC Real Estate funds. While the fund of funds is not looking at a particular franchise or sector focus, it will “certainly look to partner investment teams with different strategies and sector focus so that they have a diversified portfolio to show to their LPs”.  The firm will also look to partner with some of its existing relationships but said that these firms might not be open to subscriptions even if they want to put capital and will look to exit from a few of its investments as these funds have changed their strategies.

Kumar added that they have returned about 13% of the capital to the investors till now and will look to return about 25% of the capital in the next 18-24 months.

The Growing Fund of Funds Base

There is enough capital waiting to be deployed in India with fund of funds having India as one of their focus economies sitting of enough dry power. Singuler Guff - a leading fund of funds in the BRIC region has sufficient capital to invest from in India, Guggenheim Partners which acquired the India-focused private equity fund of funds business of Thomas Weisel Partners in 2008, has an on-the-ground presence and has completed several transactions. According to a mint report, Capvent AG is raising a $400 million focussed fund of funds with India as a main focus. Also, Emerald Hill Capital Partners, an Asian private equity fund-of funds based in Hong Kong, closed its second fund at $300 million targeting India as one of its key markets.  Recently, alternative assets and fund of fund manager LGT Capital Partners closed its second global secondaries fund Crown Global Secondaries II plc (CGS II) with $1.2 billion capital commitment. In 2009, Morgan Stanley raised a $1.14 billion for a private equity fund of funds to invest in other private equity and buyout funds.

According to a recent report by Emerging Markets Private Equity Association (a non-profit, independent, global industry association for PE & VC investing in emerging markets), fund-raising for emerging markets-dedicated private equity funds slowed in 2009, but investment activity was comparatively strong. Emerging markets captured 9% of global private equity fundraising and 26% of global private equity investment, with deal activity by transaction volume down by only 11%.

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