Investing In Indian SMEs A Compelling Play: Omar Lodhi, Abraaj Capital

In February this year, the Middle East’s largest private equity firm Abraaj Capital acquired Aureos Capital, an emerging market-focused private equity fund management group investing in small and medium-sized enterprises (SMEs). The move is a significant game-changer as it marks the entry of one of the PE heavyweights of Asia into the SME segment.

Aureos has been an active investor in India and has already deployed a $122 million fund. It is also raising a successor fund for the country. Abraaj also set up its team in India last year to chase larger private equity deals.

With both its teams in the market chasing deals between $10 million and $300 million, 2012 is expected to be an active year for the PE major in India. “We hope to consummate a couple of transactions in India this year,” says Abraaj Capital’s Asia CEO Omar Lodhi, adding that it  is looking at deals in healthcare, logistics, manufacturing and food & consumer services space in India.

VCCircle spoke to Lodhi, Senior Partner at Abraaj Capital who has been with the firm since 2005, to understand more about this investment and how Abraaj is looking at India now. Here are the excerpts:

How did the acquisition of Aureos come about? How does it fit into larger Abraaj strategy?

Over the past decade, Abraaj has had its roots in the region we call MENASA – the region between India and Turkey, with everything in the middle. And we thought that our emerging market DNA and skill set could be leveraged in other emerging markets. About two years ago, we started the push in Asia and Africa. While doing that organically, we also kept an eye out for the M&A opportunities within the GP landscape. Basel III was leading to a number of banks selling their private equity portfolios. So we went for an acquisition in North Africa in 2011 where we acquired the North African private equity fund of Amundi, which gave us on-the-ground presence in Algeria, Morocco and Tunisia. As a result, we expanded our presence in the Maghreb.

The opportunity to acquire Aureos Capital came in mid-2011. And it made sense for us because in one go, it dramatically accelerated and completed our geographic footprint and rollout, not just in Asia and Africa, but also in Latin America.

The synergies of the combined firm are compelling with $7.5 billion under management, the creation of the largest small and mid-cap investment (SMC) platform in emerging markets, a presence in more than 30 countries and the ability to capitalise on the synergies of an underlying portfolio of 150 companies.

When the acquisition is complete, we will have 160-plus investment professionals and strong local teams in these markets.

We believe that in competitive markets like India, it is all about differentiation. The SMC space, in itself, is a niche and attractive sector to target in India and Aureos has proved it through its strong track record. On the larger PE front, we are keen to leverage the opportunities arising from the growing trade and capital flows between India and other emerging markets – be it Asia, Africa or the Middle East.

Abraaj is known for large, buyout type of deals. Did SME investment figure in your strategy before this transaction?

Post-Aureos acquisition, we will have one combined firm with two platforms – namely, Abraaj doing larger PE deals and Aureos focusing on small and mid-cap investments. But Abraaj has already invested in the small and mid-cap space through Riyada Enterprise Development (RED), our $650 million investment platform that invests across the Middle East and North Africa. The RED platform will be integrated with Aureos and will continue to focus exclusively on the SMC strategy. Across these two platforms (Abraaj and Aureos), we will now be able to look at ticket sizes of $5-10 million and it can go up to $300 million.

So how do you propose to approach the Indian market?

Like everywhere in the world, there are synergies related to human capital, Limited Partners and investee companies. For instance, if we can target Indian corporate houses looking at Africa – either to explore new markets for their products or secure long-term raw material supplies, we can help them navigate that market and invest locally.

We will definitely look to deepen how we target opportunities in India by leveraging our geographic strengths – be it the India-South-east Asia nexus, India-Middle East, India-Africa or India-Indonesia where there are strong capital flows. Besides looking at transactions across the spectrum, the cross-learning in terms of sectors is also a key benefit.

The SMC strategy in India is a compelling play as it is less crowded. Access to credit is not easy for companies in this segment. That’s where firms like Aureos come in – their ability to source quality deal flow has always come to the fore.

You have also formed a JV with Sabre to target the infrastructure sector. Will you look at more such opportunities?

The JV with Sabre was not a long-drawn affair. At that time, we had thought of a country fund but investing through a pan-emerging market fund would be a better strategy. But right now, we are not contemplating any JV in India.

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