EM Capital Management LLC, a US-based fund management house, is set to launch a small and mid-cap sector India-specific fund this month that will try and raise $300 million (Rs1,324 crore) from US investors.
The fund will focus on small and mid-cap sectors in India, said Seth Freeman, CEO and managing director of the company, noting that there are other India-specific funds in the pipeline.
EM’s fund will only be the second instance of an India-specific fund being launched overseas for the small and mid-cap sector. The first such fund was launched in December 2004 by Massachusetts-based hedge fund, Monsoon Capital. The trigger for this new interest is the rally that the mid-cap stocks have been staging on Indian stock exchanges.
The Bombay Stock Exchange mid-cap index hit an all-time high of 6118.71 on 18 January after a gap of eight months. Nearly all sectors are represented in this index with technology, banking, steel, cement and engineering sectors contributing significantly to its weightage.
There is no strict definition of what size of market capitalization is used to define mid-cap stocks. In the Indian context, generally those stocks that have a market capitalization between Rs2,000 crore and Rs5,000 crore are considered as mid-caps.
“We are pursuing a multiproduct approach to India with a number of sector-specific and thematic funds, using highly quantitative, proprietory investing methods combined with inputs based on local market qualitative research,” said Freeman.
Unlike other foreign funds, EM Capital Management has set up an Indian joint venture company with advisors, EM Capital India Advisors, based out of New Delhi, to provide local research support. Most foreign fund portfolio investment in Indian companies takes place in large-cap companies, with no direct local presence.
According to a local fund manager, foreign funds are now graduating from blanket investment in the top blue-chip shares to value hunting in the small and mid-cap companies, including listed and unlisted firms. In the unlisted companies, this is taking the form of private equity investments, said the fund manager.
“High quality mid-cap stocks are giving considerably greater returns as their growth rates are higher than large-cap stocks. Most mid-cap stocks that we had identified have already given us substantial gains. We are now identifying new high quality mid-cap stocks,” said Shrinath Mithanthaya, senior vice-president, mid-cap research, Motilal Oswal Securities Ltd.