June 2011
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PE funds flow to smaller cities

Two recent private equity (PE) deals show how capital has begun flowing to companies in low-income states and smaller cities.

In November 2010, Aureos Capital, a mid-market PE firm, invested $10 million (Rs.45.1 crore today) in Apollo BSR Hospital, based in Bhilai, Chhattisgarh. A month earlier, Fidelity Growth Partners invested $20 million in Shreem Electric Ltd, a power equipment and turnkey solutions provider in Sangli, Maharashtra.

Aureos, with $1.3 billion under management globally, is looking to make similar investments in low-income states.

Balaji Srinivas, managing director of Aureos India Advisors Pvt. Ltd, said: “We are looking for deals in places like Bihar and Orissa. Fifteen per cent of our investment in the new fund will go to such areas.”

Chhattisgarh is the 17th largest Indian state by population and accounts for 1.6% of national gross domestic product. Aureos has plans to raise a new PE fund.

In order to help it look for such deals, Aureos—apart from its own India team scouting for transactions—appointed a boutique investment bank to bring transactions on an exclusive basis. Apollo BSR was a transaction sourced through such an initiative. Srinivas declined to disclose the name of the bank.

Explaining the PE firm’s strategy for such deals, Srinivas of Aureos said: “There are markets where there is no competition. These markets have enough opportunities, so you have got to go to places where others don’t go and look for deals.”

Harshal Shah, chief executive, Reliance Technology Ventures Ltd, said: “A lot of deals will originate from such places. That’s where the action will be in the next 5-10 years.”

According to him several factors have contributed to companies coming up in low-income states. “It has become a lot easier for people to commute between places. In addition the policy at the centre has encouraged competition between states.”

“The deal was also interesting as we were not competing with other PE funds due to the fact that it is not located in a major city that typically attracts a lot of PE interest,” said Srinivas.

According to Avinash Gupta, head, financial advisory, Deloitte Touche Tohmatsu India Pvt. Ltd, to put a small amount of money, say $10-15 million, to work, PE firms need to go to such places. However, Gupta cautions that it is important to plan the exit from such deals. “Investors have to make sure that the company has a pan-India reach to achieve growth because the fund eventually has to exit.”

Aureos has already deployed 80% of its $100 million South Asia investments. Of the investments made, eight are in India, four in Sri Lanka and one in Bangladesh.

“We are in exit mode now as we have been investing since 2006 in India. By the end of 2011, if all goes well, we would have exited eight out of our 13 fund investments,” said Srinivas.

In the past six months, Aureos sold a part of its stake in Continental Warehousing Corp. (Nhava Seva) Ltd to Warburg Pincus India Pvt. Ltd. It had invested $16 million in the company in 2009 alongwith ePlanet Ventures. It also sold its stake in Accutest Research Laboratories to UK-based PE firm Greater Pacific Capital in October. It had invested $4 million in the company in 2006.

Aureos is also looking to exit its take in Hind High Vacuum Co Pvt. Ltd, a Banglore-based integrated vacuum and solar equipment company that the firm had invested in 2006. “It (Hind High Vaccum) is currently raising further funds for expansion, and we may look at an exit at the right price,” said Srinivas.

On a median basis, the fund has made 2.5-3 times returns on their exits, he added.

Source: Livemint


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