IFC invests $20 mn in Pragati India Fund

IFC invests $20 mn in Pragati India Fund

Mumbai: The International Finance Corp. (IFC) has invested around $20 million in New Delhi-based Pragati India Fund, an investment firm that focuses on small- and medium-size enterprises (SMEs) in states such as Bihar, Rajasthan, Madhya Pradesh, Chhattisgarh, Jharkhand, West Bengal and Orissa.

“These states have been ignored, and there are perception issues," said Narayanan Shadagopan, Pragati’s founder and managing director. “There is not a single fund focusing on them. We would have normal private equity (PE) funds’ expectations of (internal rate of returns) of mid-20s."

He added that the fund, which was launched last year, would prefer investments in the range of $5-10 million by offering stakes between 25% and 35%.

“We are looking at 10-15 investments through this fund (Pragati). It also offers us diversification. One of the reasons for our interest is our own success in (investments in) these businesses," said Thomas S. Davenport, director, IFC-South Asia.

“Since investing directly in SMEs is difficult, we are looking at co-investment opportunities like the one with Pragati," said Rashad Kaldany, vice- president, global industries, IFC.

IFC, a member of the World Bank group and the largest global development institution focused exclusively on the private sector, recently made commitments to other SME-focused Indian funds such as Ambit Pragma Fund II, Zephyr Peacock India Fund III and Forum Synergies (India) PE Fund.

It is planning to invest up to $100 million across around seven funds in India this year.

In India, SMEs typically receive only 5% of all private equity capital, forcing them to rely on high-cost informal borrowing since most capital infusion happens in metros and tier-I cities.

Pragati plans to raise $75-100 million, and, other than IFC, has received commitments of $50 million from the Commonwealth Development Corp., part of the UK government’s department for international development. The investment is expected to help it provide growth capital to companies outside major urban areas.

Stressing that Pragati is not a social fund, Shadagopan said the emphasis would be on identifying companies that will not only scale up to the level of offering commercial returns but also create jobs and promote inclusive growth.

Shadagopan said Pragati would not be a clean-tech fund and that it would stay out of natural resources, mining and real estate. “We are keen on waste management and capital goods," he said.

The fund plans to target companies with revenues of 50-250 crore. Exits would mostly be through strategic sales. “If the turnover reaches 350-450 crore, we could also opt for an initial public offering (IPO)."

SME investors such as Mukul Gulati, managing director, Zephyr Peacock India, say there has been an increase in interest for venture capital and PE funding for SMEs in India.

“Valuations are sensible in the SME segment; there are so many more deals and there is need for capital," Gulati said. He, however, cautioned that management risks are high in the SME segment as exposure is often limited and exits can take longer. “I believe that in SME investments, the positive will outweigh the negatives."

IFC, meanwhile, is raising a $1 billion private equity global infrastructure fund. “Around 15-20% of the fund may find its way to India," said IFC’s Kaldany.

Recently, World Bank president Robert Zoellick said IFC will invest $1 billion in India this year. IFC has invested $3.5 billion in several projects in the country till date.

deepti.c@livemint.com

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