UK’s CDC Group tweaks India strategy, plans to focus on debt

UK’s CDC Group tweaks India strategy, plans to focus on debt

Mumbai: CDC Group, the development finance arm of the UK government, will change its investment strategy in India.

So far it has committed about $1.2 billion (around 6,000 crore) to India and 95% of this is towards equities and bulk of this is done through private equity (PE) funds. It will now focus on debt and go for direct investments as well as co-investments along with its PE fund managers. It will also make investment in early-stage funds.

CDC has invested at least $1 billion across 17 funds in India, including Multiples Private Equity Fund, Peepul Capital Fund and New Silk Route.

“We will now ramp up our direct investments and co-investments in India," said Anubha Shrivastava, managing director-Asia of CDC.

The direct investment will help it focus more on investments in regions or sectors that are not accessible to it in a large way. “It will help us focus on areas which will have more of an economic development impact and more specifically within certain regions," said Shrivastava.

In the past, CDC had made direct investments in companies such as Infrastructure Development Finance Co. Ltd and ICICI Bank Ltd.

In addition, it will also focus on investing in the poorer states in India. “There will be a focus on the eight poorer states in India but there will also be a pan-India programmes," said Shrivastava.

Going by the Multidimensional Poverty Index (MPI), developed by the Oxford Poverty and Human Development Initiative with support of United Nations Development Programme, acute poverty prevails in eight Indian states and collectively they account for more poor people than in the 26 poorest African nations combined. The eight states are Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, and West Bengal.

In May 2011, CDC announced a new high-level business plan, following a review of the organization announced by the department for international development in October 2010.

Shrivastava said debt will become a larger part of CDC’s India portfolio going forward. “We will invest more in debt, though we have already invested in a couple of debt funds. Also, we will invest in some more innovative debt products as the demand for it increases."

According to Sanjiv Singhal, managing director, Banyan Tree Finance Pvt. Ltd, the flurry of PE participation in debt deals has triggered interest among investors in PE funds, known as limited partners (LPs).

“There is a lot of opportunity because such funds are doing deals which banks find it difficult to do," said Singhal.

Kohlberg Kravis Roberts and Co., or KKR, has deployed close to $1 billion across debt deals in India through its non-banking financial company.

Another PE fund, Apollo Global Management Llc, plans to look beyond equity in India and invest in debt, Mintoo Bhandari, managing director, AGM India Advisors Pvt. Ltd, the adviser to Apollo’s global funds, had said in an interview with Mint last month.

Apart from increasing its India exposure, CDC is also looking to invest in early-stage venture capital funds to diversify its risk and earn more returns. “Valuations are moving down to the early-stage funds who are saying that the larger funds are willing to do smaller deals at three-four times their value," said Shrivastava. “However, the value is still there in venture investments."

CDC made its first investment in an early-stage fund, Seedfund, in 2010. It invested $13 million in the firm which is raising a $52 million fund.

Currently, there are many early-stage funds in the market to raise money. “We are examining them and might invest in some of them," said Shrivastava. CDC is looking for real early-stage players who will invest in smaller transactions, unlike some the venture funds that slowly increase their fund size and correspondingly the size of deals.

According to Mohanjit Jolly, managing director at VC fund Draper Fisher Jurvetson India, LPs are noticing the increased activities in the start-up environment. “They have realized that small Indian firms can go global and give returns in contrast to late-stage PE funds from which returns may not have been as expected."

A typical VC investment can give five to 10 times returns though the risk is higher compared with PE investments, he said.

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