Avendus PE Investment Advisors is launching its third private equity vehicle to invest in PIPE deals in India, a source with direct knowledge of the matter revealed to Private Equity International. The fund is expected to come to market during the first quarter of 2013.
Avendus Fund III is targeting INR 5 billion (€71 million; $92 million) and will invest in listed mid-sized companies. The source said it will have a four-year investment period, with a 2 and 20 percent fee and carry structure.
The firm declined to comment on the new fund, but Manoj Thakur, chief executive of Avendus, explained that alternative strategies in India are crucial to private equity investors. Avendus invests in listed companies via a private equity model.
It takes small equity stakes in businesses it believes are undervalued on the Bombay Stock Exchange then works with the management to improve corporate governance and investor relations. Avendus doesn’t take board seats on the companies but will often recommend potential board members to promoters.
According to Avendus research, there are 3000 regularly traded companies in India, of which more than 2750 have a market capitalisation of less than $1 billion. Thakur explained that only the largest 250 of these companies are well-researched, leaving many good-quality small- and medium-sized enterprises undervalued on the stock exchange.This creates attractive investment opportunities for fund managers, Thakur says, with Avendus planning to acquire equity stakes of less than 10 percent in each business.
Despite a weak fundraising environment in India, Thakur believes the firm’s strategy will attract LPs.
He said, “The biggest problem for LPs is the high entry valuations in the Indian market. Nine out of ten LPs are going to tell you valuations in the Indian market are high and they will normally compare that to China. There are a lot of undervalued opportunities you can find that are at a huge discount to the unlisted universe.”
Thakur continued that the firm is also addressing the inherent difficulties Indian GPs experience when trying to exit their portfolio companies. “[Private equity firms] have to depend on strategic buyers or IPOs for exits, which may or may not happen. We sell on the floor of the market without depending on strategics or IPOs.”
Avendus PE Investment Advisors is the alternative asset management arm of the Avendus Group. The firm has raised two previous private equity vehicles focusing on PIPE deals in India. Fund I has returned 60 percent of capital to investors at a net IRR of 14.4 percent, while Fund II, which was launched in 2011 and has a four-year investment period, has a current net IRR of 15.4 percent, according to the firm.