Funds line up a host of offerings for SMEs

The trend of launching private equity (PE) funds to invest in small and medium enterprises (SME) is catching on in India IndiaCo Ventures Ltd, a Pune-based wealth advisory and investment firm, is planning to launch an offshore PE fund that will primarily focus on SMEs. The road show for the fund is scheduled to start in the first week of December. IndiaCo plans to raise nearly $500 million from Europe and West Asia.

“We have commitments from some investors who know us well. The fund will be ready to invest by the first quarter of 2010. The target is to invest in growing sectors such as clean technology, telecom services, defence and aerospace, precision manufacturing, healthcare, and IT solutions. The investments will range from $10-50 million per company while the investment tenure will be three-five years. The investment cap will be 10 per cent of the fund in one company,’’ said Rahul Patwardhan, vice-chairman and managing director of IndiaCo Ventures Ltd.

The fund will be based in Singapore or Mauritius. Recently, ICICI Bank had launched an SME PE fund for which money-raising is on. Among others who have launched PE funds for SMEs are Iceland-based investment bank Askar Capital in association with Nikhil Gandhi-promoted SKIL Group. SIDBI Venture’s third SME PE fund recently raised Rs 350 crore from domestic banks. The company has said that it is close to its target of raising Rs 500 crore.

Small companies are growing at 30-40 per cent per annum and their cash flow is sufficient to meet their working capital needs, say industry executives. However, they need to expand their equity base but can’t raise $10-15 million without selling a majority stake. Is is here that these funds come into the picture as they provide growth capital to SMEs by taking a significant minority stake. However, the threat to smaller companies remains as funds launched by corporate houses are also buyout funds, which can create a scenario for hostile takeovers.