After proving to be a bit hit in most Asian markets, private equity (PE) majors are lining up a bevy of ‘mezzanine funds’ for the Indian market. These funds, which are typically debt-dominated instruments with an equity “sweetner”, basically provide medium-to-long term capital to promoters without significant ownership dilution.
While from the lenders’ perspective, mezzanine funds offer a measure of downside risk protection, these funds are widely predicted to gain favour with mid-cap Indian firms, where promoters would relish the opportunity of not ceding considerable shareholding while raising funds.
ICICI Venture — India’s largest PE firm — is in the process of closing the country’s first mezzanine fund. ICICI Venture’s ‘India Advantage Fund VII’ would offer $110 million in its first round of fund raising, over half of which has already been committed by limited partners. The fund is among the single largest country-focused mezzanine fund in Asia’s emerging markets and the corpus could be scaled up to $1 billion in the second round of fund raising, according to industry sources.
Besides, Darby Overseas Investments — the PE arm of Franklin Templeton Investments — has launched the Darby Asia Mezzanine Fund II, which has secured institutional commitments of $300 million and committed investments through an affiliate in Faridabad-based Escorts Construction Equipment Ltd. Kendall Court Capital Partners’ second fund is also said to be eyeing investments in India.
In a typical PE fund, returns on investments are only realised when the investments are sold, thereby entailing no steady cash flow to investors. Mezzanine funds are beginning to score with PE firms as the equity component of the investment offers the lender upside potential, while the debt component — which generates steady interest payments — provides a measure of downside risk protection.
Since mezzanine funds contain debt, or debt-like instruments, those receiving the capital investment have to make interest payments, therefore generating significant current income for investors, especially in case of long-gestation investments, such as in the infrastructure sector.
Mezzanine funding, which took root in Asia in 1998, began to gather steam by 2004 when four fund management firms launched their funds simultaneously, ushering in $283.7 million to the industry in the same year.
By the following year, mezzanine funds had firmly established their profile in the Asian private equity fund pool when over $1.3 billion of fresh capital came into the market, largely fuelled by the final closing of European PE major ICG’s maiden Asia Pacific fund, at $500 million. After a decade of growth, the mezzanine fund pool in Asia stood at around $2.82 billion, according to Hong Kong-based Centre for Asia Private Equity data.
Source: Sify