Kotak Investment Advisors Ltd (Kial), a subsidiary of Kotak Mahindra Bank Ltd, closed its $440 million (Rs1,760 crore) fund this week, raised entirely from domestic investors. The Kotak India Growth Fund II will likely bring in an additional $160-200 million from international investors. This would put domestic limited partners (LPs) at around 70% of the fund—a jump from the 50% domestic contribution in the firm’s first growth fund of $160 million.

The company’s first fund— India Growth Fund, a joint venture with SEAF India Investment Advisors—has now been fully deployed. Its follow-on fund will continue with the same investment strategy. It will fund companies in global manufacturing and services, those that gain from increased domestic consumption and consumer spending, or those in the infrastructure or infrastructure-led service sectors.

The firm’s second fund, a $100 million life sciences fund, is 30% deployed. Kotak is also planning a $1 billion infrastructure fund that will focus on airports, ports and roads.

Kotak’s assets under management are now $1.4 billion across its private equity and realty funds, and are expected to be $2.5 billion by next March. Nitin Deshmukh, chief executive officer of Kotak Private Equity Group (part of Kial), spoke with Mint about fund-raising in this bearish market climate and the changing nature of domestic LPs. Edited excerpts:

Fund-raiser: Nitin Deshmukh says 2008 will be very difficult for first-time funds

We launched the fund in January, which is when the turmoil (in the equity markets) happened. So, it was not the best timing. But having said that, we did get a good response.

For one, when the public markets are choppy and returns are dropping, private equity, with its stable returns over a longer period of time, becomes an attractive alternative. But investors want a track record. We haven’t yet come to exits, but have demonstrated that we can execute a strategy.

So it turned out to be a good time for fund-raising?

In hindsight, yes.

The other reason is that there are many investors, both institutions and high net worth individuals (HNIs), who have made significant returns in the stock markets. So there is a level of surplus cash and an appetite for looking at alternative instruments such as real estate, realty funds, private equity funds and probably others such as infrastructure.

Do you think fund-raising will continue to be smooth in 2008?

For first-time funds, it will be very difficult. Institutions and HNIs want stability and a brand.

How has domestic fund-raising changed?

Clearly, private equity is in the limelight now, with strong exits reported all the time. We were the first to raise funds from HNIs in 2005 and the level of understanding has improved dramatically since then.

Who are the typical domestic LPs?

Banks, insurance companies, corporates and HNIs.

How do they access you if they want to invest?

We have a strong wealth management practice. So, the distribution network is in place. Also, some of the entrepreneurs whom I have funded in the past, who are now successful, are investors in the fund.

What are your requirements of HNIs?

Our client base is very large in this space. So, we had to be very selective and ensure they understood the product well because it is a long-term commitment. We didn’t have investments below Rs5 crore.