Mumbai: ICICI Venture Funds Management Co. Ltd, the private equity (PE) subsidiary of the country’s largest private lender, is betting on consumer demand driving wealth creation in India’s smaller, non-metro cities.
ICICI Venture, which recently made its first closing of $350 million (Rs1,596 crore) exclusively from domestic investors for a $500-800 million fund it is raising, has at least two deals lined up in the domestic consumer space, said Vishakha Mulye, managing director and chief executive of ICICI Venture. She declined to give details.
“Various products and services that were consumed by the urban consumer in the last decade will be demanded by the tier II consumer,” Mulye said.
For example, second-hand car dealers are seeing an unprecedented increase in demand from non-metro cities such as Vadodara or Nagpur, where more people are looking at buying used vehicles as their first car, she explained.
New territory: Products and services used by the urban consumer over the last decade will now be in demand with the customer in tier II cities, says ICICI Venture’s Mulye. Used cars are one example of this trend. Ashesh Shah/Mint
“Consumption mix will change in urban areas. For example, companies creating linkages, means of distribution for such services to the tier II cities, would be required for these new customers,” she added.
One of the largest PE firms in India, with around $2 billion under management, ICICI Venture has around 20 companies in its portfolio. It is looking at exiting two of its investments over the next year, said Mulye.
Other areas of interest for ICICI Venture include microfinance institutions offering products such as insurance and outsourcing, which would include manufacturing such as for auto components and contract pharma production.
With an investment sweet spot of $25-60 million, the PE firm is also interested in capacity building for infrastructure, including roads, ports and hospitals.
Over the past six months, institutional investors such as venture capital and private equity firms have started betting big on consumer demand expanding in India, driven by a young population with rising incomes in an economy forecast to expand 7.2% in the fiscal ending March, and accelerating further.
According to industry estimates, there are at least 600 institutional investors in India, with at least 40 others in the process of raising funds. This may lead to a situation of too much capital chasing a few good companies in the short term.
“Investors (have) got to be very selective in what they fund in the short term,” said Mukul Gulati, managing director, Zephyr Peacock India, a PE firm. “We do not have enough companies to sustain private equity capital. Investors need to be careful about not overpaying...”
Still, growing domestic consumption demand will continue to attract investors for at least a decade, experts said.
“Private equity investors get attracted by leverage, multi-expansion and growth. In India, PEs are getting attracted to the growth because valuations are rich and leverage is not that much,” said Pankaj Dhandharia, national director, Ernst and Young Pvt. Ltd.
ICICI Venture is looking at backing the right people/teams, said Mulye, outlining the firm’s investment philosophy.
“You can work with a good promoter on even an untested business idea, although one always looks for a good combination of both,” she said. “We want to handhold and not run the company.”