Owing to a difficult fund raising climate globally, Arka Capital, a private equity firm founded by former Warburg Pincus managing director Rajesh Khanna (right) and two others, has decided to cease operations, at least two sources with the direct knowledge of the development told VCCircle. The PE firm had hit the road to raise around $400 million eight months ago.

Khanna and his two partners, Rohit Kapur, formerly head of KPMG Corporate Finance, and Cyrus Driver, former India head of Helix Investments, would be deciding on their respective future courses of action, the sources said. A spokesperson for Arka Capital confirmed the development to VCCircle.

Khanna, who was a managing director and co-head of PE major Warburg Pincus, left the firm more than a year ago to start his own fund in partnership with Kapur and Driver.

Khanna, who had spent about 15 years in Warburg, had investments like Bhart Airtel and Max India Ltd to his credit. Bharti Airtel's was considered one of the best exits in Indian PE history.

Kapur was mainly on the sell side as he drove businesses like M&A advisory, business sales and disposal, valuation services, private equity advisory, debt syndication among others which came under the corporate finance group of KPMG. Driver, on the other hand, led both growth capital and buyout deals at Helix for four years, and prior to that he was with J.P. Morgan Partners Advisors in Singapore and Mumbai. 

Arka Capital began its fundraising only by the second quarter (April- June) of 2011. While the exact reasons for the firm's closure could not be ascertained, it's likely the team decided to give up due to to the prolonged nature of fund raising environment globally. Very few first time Indian funds have raised capital in the recent past. Renuka Ramnath, former head of ICICI Venture, and Ajay Relan, former India head of Citi Venture Capital International, were able to raise capital. But both Ramnath and Relan were in the market since 2008-09, and the fund raising environment wasn't too bad when they kicked of on their own.

The Indian PE industry had witnessed a huge churn in the last couple of years with top executives quitting their well-established firms and going solo. If Ramnath and Relan belonged to the first batch of such executives and were successful in raising money, the managers who came in later are still on road. They include PR Srinivasan, former MD & India region head of Citigroup Venture Capital International (CVCI), and Subbu Subramaniam, formerly of Baring Private Equity, who had a first close at $60 million.

The most high profile exits this year were of Manish Kejriwal, former head of India, Africa and the Middle East operations at Temasek Holdings (the Singapore government-owned sovereign wealth fund), and Sunish Sharma, managing director at General Atlantic India, who left their respective companies to form their own private equity firm – Kedaara Capital Advisors. Ranjeet Nabha, former MD & CEO of WL Ross & Co (India operations), is another executive who has turned entrepreneurial.

It's not just first time funds, but the second and third time funds are also facing a tough time in the fund raising world. As many as 60 India-based private equity firms are out on road to raise money for their first or follow-up funds, expecting to mop up over $13 billion, according to VCCedge, the financial research platform of VCCircle. "There is a meaningful reduction in the appetite of LPs towards Indian funds," said Jason Sambanju, managing director and co-head (Asia) of Paul Capital, a global alternative investment firm managing $4 billion in so-called secondary investments or second-hand LP interests, in a separate interview to VCCircle.

If Arka Capital has thrown in their towel now, the market had started seeing some signs of correction. For instance, Pravi Capital, a domestic private equity firm founded by former ICICI Venture executives, decided to join hands with ASK Group, a diversified financial firm, to launch its maiden PE fund worth $250 million. Both the parties are sharing the economics of the business at an asset management level.

As the market trends show, fund raising is going to be a long haul, and that will result in a decline in the number of re-ups or new General Partner (GP) partnerships. Also the GPs will face challenges like a lack of differentiation in strategies, team compositions, expensive entry valuations, and above all, the sector's poor exit performance till now vis-a-vis markets like China.

Besides, the LPs themselves are facing their own capital raising constraints and most investors are focusing much of their attention on cleaning up their existing GP relationships. Also, capital has a way of migrating to the best opportunities and because of all this, the industry seems to be convinced that fundraising timeframe for most of the GPs will remain extended in the coming year.

Leave Your Comment(s)