India's MCap cancels plans for a second fund

Two team members, including founder Subbu Subramanian, remain to manage out the remaining eight positions in Emblem FII. The firm has so far achieved two full exits from electrical appliance manufacturer V-Guard Industries and City Union Bank, and a partial exit from pipe and tubing producer APL Apollo Tubes.

V-Guard generated a 2x multiple and a 60% IRR, while City Union Bank returned 2.5x and an IRR of 15%, Subramanian told AVCJ. "In March of last year we achieved a 38% DPI [distributed to paid-in] and after that we tested the market with a number of LPs, including our existing anchor investor from the Middle East," he added. "We were disappointed by the response and decided it wasn't worth devoting any more time and management attention to the effort."

He sees the weak response of symptomatic of an Indian private equity industry that has not delivered consistently - and macroeconomic conditions that led to rupee depreciation did not help GPs with US dollar-denominated funds. At the same time, many LPs want to make a larger commitments to a concentrated pool of managers and internal restrictions on the percentage of an individual fund they can cover means smaller GPs miss out.

MCap's strategy was also problematic for LPs. Half of Fund I went into private transactions and PIPE deals in which listed companies receive expansion capital, while the rest went into pure secondary share transactions. "Our returns were dismissed as having come from listed companies as if they were not returns at all," Subramanian said, noting that having the flexibility to play across the capital structure is actually a valuable strategy when markets are tough.

PIPE deals have long been a feature of the private equity Indian market. While there have been plenty of largely passive investments, PE firms also target companies that have gone public too early and end up with minimal liquidity and limited ability to raise capital. GPs commit growth capital for significant minority positions and attempt to reinvigorate these businesses.

According to AVCJ Research, of the $106.5 billion deployed in Indian private equity transactions over the 10 years to 2016, 22% went into PIPE deals. For Asian private equity as a whole, the PIPE share is 15.5%.

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• Topics
• South Asia
• Fundraising
• Growth
• GPs
• MCap Fund Managers
• India