A conduit into India’s small business universe

Dubai: There is more to small business activity in India outside of eCommerce and tech services. This is what the promoters of a specialist fund are hoping to convince high networth non-resident Indian investors in the UAE and the rest of the Gulf.

The Indianivesh Growth and Special Situations Fund can now tap NRIs following the recent regulatory approval allowing foreign direct investments in such funds. Following this, the promoters are looking to generate up to Rs250 million (Dh13.88 million) from NRIs, with the minimum exposure set at Rs2.5 million and in multiples of that thereafter.

“The Indianivesh Fund — launched in association with First Bridge — was introduced in early 2014 and secured the first investment in July of that year,” said Siddarth Razdan, the fund’s Head of Investor Relations for NRIs. “The India component of the fund has to date raised Rs1 billion, including commitments from LIC (Life Insurance Corp.) and GIC Re as well as the Oriental Bank of Commerce.

“They have committed Rs455 million, with another Rs225 million coming from sponsors and the rest from high networth investors.”

The fund’s first investment exposure was in a quick-service restaurant chain, and has since homed in on a children’s wear brand and an automatic car washing systems firm.

The investments will target small to mid-sized businesses with a profitability track record, and individual exposures in these will range between Rs50 million to Rs200 million. (The fund also has plans for a possible presence in Dubai, either directly or through a tie-up.) ‎ The average timeline for the fund to retain its presence in a business would be three to four years. And an exit would ideally be through selling the stake to a strategic/financial investor or by way of a merger and acquisition play. “Hence, it is not dependent on an IP0 as an exit option,” said Razdan.

“The fund’s primary focus is in the consumer space where we have lot of first-hand experience.”

But are high networth NRIs willing to look at small businesses outside of tech or eCommerce? That’s where the big-ticket deals have been happening including commitments made by the likes of Japan’s Softbank and the former Tata Group supremo, Ratan Tata.

“Most bigger private equity funds operating in India tend to have a minimum ticket size of $10 million at the lower end and going up to $200 million at the higher,” said Razdan. “Big global names like KKR Blackstone operate in India and there are several home grown players like Reliance ADAG.

“Very few funds look at smaller companies in the private equity space. We do not invest in cash burning companies, primarily existing in eCommerce or in technology.”

Potential investors will also be taking cues from what is going on in the wider Indian economy. The Indian stock markets have been looking decidedly shaky in recent days over such concerns. The other major depository of NRI commitments — India’s property market — too has had bouts of volatility in recent quarters.

For its part, the Narendra Modi Government has a lot riding with its liberalisation plans and thus, hopefully, ensure India does not get caught out by the slowdown in China and some of the other emerging markets. The ‘Make in India’ initiative — by which it plans to draw in commitments for the manufacturing sector — is to receive a major boost in the coming days.

All of these related processes could create enough of a momentum behind India’s small business universe. And, simultaneously, create opportunities for private capital to find an emerging asset class.

It can even be one outside of tech, eCommerce and life sciences. For the Indianivesh Growth fund promoters, that would be the sweet spot.

Going deep into the small business investment space

The promoters of the Indianivesh Growth fund are weighing the possibility of an offshore feeder fund denominated in dollars. In the Gulf, the fund will target NRIs, family offices and institutions.

The private equity fund is close-ended ‎ and regulated by SEBI (Securities and Exchange Board of India). The sponsors, including the fund manager, have committed Rs225 million to the fund, which is more than 20 per cent of the fund at present.

The fund will also work directly with invested companies to help them chart newer growth routes.