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Rajesh Khanna’s Arka Capital Ceases Fund Raising, To Close Down

30 December, 2011

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.

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Anirudh . 6 years ago

Sorry to hear that. But, I am afraid most of the other PE managers who also recently ventured on their own may end up similarly.

Anon . 6 years ago

Its quiet odd as to how investment pros with 15 years experience time their own business of fund raising so badly. How can they possibly decide good entry and exit times for others / LPs ?

Infact it is difficult to appreciate if raising funds for existing employers, leave alone starting one’s own PE is wise.

Most PEs in India may be in even deeper _ _ _ _ by next year.

Prentiss . 6 years ago

Sad to hear but very likely to be repeated. Several factors are at play:

1. Money is tight everywhere – Fund managers have to be able to endure a long fundraising period. So if you want to attract capital when the headwinds are against you, you better be offering something different and compelling.

2. Less interest in India: Much of the prior interest in Indian private equity came institutions initiating their BRIC allocations. Now, in a time of scarce capital, investors look at India as a laggard. Interest and capital are flowing to other regions with better return profiles.

3. Investors are culling their portfolios-Darwinism at work: Investors now have experience with existing fund managers (it was different when no one had a track record). When Indian managers look to raise follow-on funds, investors are choosing only to back the few funds that delivered compelling results (the proven) and will pass on those that disappointed – meet the dinosaurs.

The bar has been raised – who is up for the challenge?

S.A.REHMAN . 6 years ago

Taking Fat salaries and big designation is one thing and performing without an established brand is difficult and dangerous as well !!!

Chethan . 6 years ago

Though it is a sad news, such incidences are part and parcel of PE Industry. In fact PE industry has one of the highest mortality rates. I believe this situation is much better than those who have raised fund in peak of 2007-2008 and invested at high valuations.

Abhay . 6 years ago

quite brave of them to draw the line while others continue to live in fading hope. They are a smart bunch of guys and will emerge stronger. All the best to them.

Sanjay . 6 years ago

Sorry to hear this but atleast they are bold enough to draw a line and move on (like Accel which also decided to stop their fundraise)! This is not a reflection on the team as this is an extremely challenging fundraising environment and unlike most previous crisis, India is not hot right now. Many others continue to live in a world of false hope, ultimately the Indian PE industry will right size and there will be a more even demand supply matching for deals but not before the pendulum swings to the other side. LPs work like a herd and most of them are moving away from India which will lead to some very good investments in 2012-14 vintage in India. Hopefully all of this will lead to the development of a more stable PE industry in India.

Rajesh Khanna’s Arka Capital Ceases Fund Raising, To Close Down

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