Chennai-based private equity firm TVS Capital Funds Ltd, which manages TVS Shriram Growth Fund-I, is planning to raise up to Rs 500 crore for its top-up fund from domestic institutions and high networth individual (HNIs). This add-on fund is expected to make its first close by December this year.

TVS Capital, which has till now invested in privately held companies primarily in the consumption space, is currently looking to invest in sectors like manufacturing and also in listed companies, a top executive of the firm has told VCCircle.

The new raise is an add-on fund via a parallel scheme called TVS Shriram Growth Fund-IB, and it is targeting Rs 400 crore with a green shoe option to raise another Rs 100 crore, said TVS Capital chairman & MD Gopal Srinivasan. He said that the sponsors – the TVS Group and the Shriram Group – are expected to put Rs 50 crore in this fundraising, with another Rs 50 crore expected from ‘family & friends.’

While the fund is being distributed by ICICI Bank and HDFC Bank on the retail side, Centrum Capital will market it to the institutional investors. The fund has a life of seven years (with two extensions of one year each), with a 2:20 per cent cash/carry and a hurdle rate of 10 per cent.

Srinivasan said that TVS Capital is raising a top-up of the 1A fund (instead of fund II), as it does not want to change the character of the fund and wants to continue with the same strategy, thus "building on the existing momentum and strong deal pipeline". According to him, TVS Capital will look at how the Indian PE landscape develops for the next fund by 2014, which may also tap new sources of capital and include other strategies like controlled transactions.

Besides consumption plays, TVS Capital is now looking at deals in the manufacturing and infrastructure services companies as “there is a resurgence in those sectors.” TVS Capital is also upbeat on PIPEs, with SEBI’s changes to the takeover code.

TVS Capital has already deployed over 80 per cent of its current fund across nine investments and expects to close two more investments from the current fund. The firm has been particularly active over the last year completing six investments (including a follow-on round) since November, 2010.

Besides Srinivasan, TVS Capital’s investment team includes former Hindustan Unilever vice-chairman D. Sundaram and Manish Makharia, who was recently roped in from Kotak Mahindra Investment Banking Group.

Raising Domestic Capital

TVS Capital raised its maiden fund in July, 2008, with commitments of Rs 500 crore, and later added another Rs 100 crore. TVS Shriram Growth Fund-IA was one of the first to raise a complete Rupee fund. This time, too, the fund is looking to tap Indian limited partners, which includes banks and insurance companies, as well as HNIs.

“I think India is developing a very strong trend of HNIs, ultra-HNIs and family offices investing in private equity funds,” said Srinivasan. He added that through PE commitments, these investors are looking at sustained returns over five-six years, ability to access mid-cap space & emerging sectors, and immunity from mark-to-market losses.

However, banks and insurance companies are very selective, added Srinivasan. “I think a lot more work needs to be done by the industry to bring the RBI, IRDA and the PFRDA (Pension Fund Regulatory and Development Authority) regulator, and the Holy Grail will be to get the charitable trusts and endowment act amended – so they can invest in equities. Today, the latter’s corpus is diminished because they are permitted to invest only in securities, which actually have a negative rate of real return,” he explained.

Since 2009, several PE firms have tapped the domestic capital for their funds. Faering Capital’s India Evolving Fund raised Rs 830 crore while Aditya Birla Capital Advisors also closed its maiden fund at Rs 880 crore from domestic LPs. Some funds have also raised money from domestic LPs before starting overseas fundraising, such as Reliance Equity Advisors, Renuka Ramnath’s Multiples and ICICI Venture’s India Advantage Fund Series 3, among others.

TVS Capital, whose first fund had as many as 600 investors, has voluntarily raised the minimum threshold of commitments to Rs 50 lakh from the earlier Rs 25 lakh. But with a lot of HNI investors, there will be added costs and additional work like ensuring robust communications with investors and holding regular webinars and annual meets. TVS Capital is also adding data rooms for investors and a whistle-blower initiative.

There are also several advantages of raising a Rupee fund. The Indian market understands business group identity helping in fundraising, besides getting an edge in deal-making, since the PE firm can invest in FDI-restricted sectors like retail, media and banks.

Investment Strategy

“We look at areas which are growing because of two things – the GDP growth and the per capita income growth,” said Srinivasan, adding that there will be more than 600 million Indian consumers living a fairly decent lifestyle by 2025 whose needs will be served by businesses, which are not yet scaled up enough. Also innovative ideas, not yet developed, may play a key role in meeting those requirements.

One of the bets TVS Shriram fund has made on GDP growth is its latest Rs 70 crore investment in MedPlus Health Services Pvt Ltd, India’s second largest pharmacy retail chain. Its bet on per capita income growth includes Rs 65 crore in Landmark Ltd, a book and music retail chain owned by Tata Group’s Trent.

Another source for deals is through other funds where it can bring in its expertise in local marketing and brand creation. TVS Capital has around five venture advisors who work with its portfolio companies. They include RPG Group director Pradipta K. Mohapatra and Landmark founder Hemu Ramaiah.

It has also worked with the US-based private equity major Mount Kellett Capital and Ajay Piramal’s healthcare fund India Venture Advisors to invest in MedPlus. TVS Capital is currently working on a deal in the agribusiness sector, which has been sourced from another private equity player.

Srinivasan said that some businesses like facility management firm Dusters Hospitality, Landmark and TVS Logistics may be ready for an IPO exit by 2013. And some of its more mature investments like MedPlus and Ratnakar Bank are potential IPO candidates.

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