Bangalore: Two Chennai-based conglomerates, TVS Group and Shriram Group, on Wednesday launched a Rs500 crore private equity fund that aims to use the current downturn in the market, which made equity cheaper, to build its portfolio of investments.
“Public market is a benchmark for valuation and bargains are relative to that. We will probably now get more realistic valuation aspirations,” said Suresh Raju, executive director of TVS Capital Funds Ltd, which is managing the new TVS Shriram Growth Fund. Historically, private equity funds which have started during market downturns have outperformed funds that have invested in a bull market, he said on phone from Chennai.
The market declines this year have taken valuations of companies, or the number of times their stocks trade against earnings per share, considerably down. For instance, the combined multiple for companies in the Bombay Stock Exchange’s Sensex is now a little more than 14, compared with 28.5 in January when the benchmark index hit a record.
The prevailing stock valuations, low appetite for initial public offerings and a tight market for credit, will make bargaining easier for investors such as private equity funds with firms looking for capital.
The new fund will focus on financing mid-sized businesses in sectors such as health care, education, hospitality, speciality retail, food and agriculture as well as consumer media and entertainment.
“We feel providing growth capital to companies in these sectors can lead to disruptive growth and produce high returns,” said Raju. With a large and growing consumer base, rising incomes and changing lifestyles, India is expected to become the world’s fifth largest consumer market over the next couple of decades, and this fund is designed to tap this opportunity, he added.
The firm will look at companies with a turnover of Rs50-100 crore per annum and have proven business models. It plans to focus on emerging cities as well as metros and invest Rs10-50 crore in each venture by picking a “significant minority” stake, or 20-35%, and taking at least one position on the target firm’s board.
For the next one year, the fund seeks to invest in six-eight companies, targeting opportunities primarily in Tamil Nadu, Andhra Pradesh, Karnataka, Kerala, Maharashtra, Gujarat as well as New Delhi and its satellite cities.
Though talks are already on for a few deals, nothing has been finalized yet, Raju said.
The fund, which has an investment horizon of four years, is open to all kind of exit routes for its investment—initial public offering, potential sale of business, stake sale to promoters themselves or to another private equity firm.
TVS Capital Funds intends to raise an additional corpus of Rs500 crore over the next one year from offshore investors. In future, the fund intends to mobilize sector-specific funds.
Its board includes University of Michigan’s C.K. Prahalad, Shriram Group’s founder R. Thyagarajan and Cognizant Technology Solutions’ vice-chairman Lakshmi Narayanan, among others.