Social infrastructure interests Abraaj Capital
Mar 07 2012, 10:24 | By CNBC-TV18
Omar Lodhi, CEO of Abraaj Capital Asia
Image: SME Mentor
With the M&A of Abraaj & Aureos Capital, Omar Lodhi, CEO, Abraaj Capital Asia states that this has created the largest SME and PE business in emerging markets.
He believes India is an attractive destination now because there is space for deal making negotiations considering less liquidity in domestic markets, valuation is more sensible and the entrepreneurs more ready for talks.
Below is an edited transcript of Omar Lodhi’s exclusive interview on CNBC-TV18. Also watch the attached video.
Q: Middle East based Abraaj Capital that has over USD 6 billion of assets under management in EMs of Asia, Africa, Middle East and Turkey acquired Aureos Capital. Aureos is an SME focused fund with about USD 1.3 billion invested in EMs including Latin America This interesting M&A transaction took place this week in the private equity industry especially in such volatile times. What were the key drivers you would say behind Abraaj’s acquisition of Aureos?
A: The biggest headline is the fact that coming together of these two platforms creates the largest SME and private equity business in EMs with presence in over 30 countries, 150 investment professionals, managing a 150 underlying investee companies and managing 7.5 billion assets under management.
Q: The world has been experiencing a liquidity rush at least since the beginning of this year. What is your funding position and is private equity finally putting some cash back to work having waited because of declining valuations in the last several months?
A: Within the private equity landscape, also one needs to differentiate between the western worlds and the EMs etc. I think the overhang of money burning holes in people’s pockets was probably a phenomenon that the industry was witnessing in the west. However, in EMs we raise money around growth capital needs. Those needs with the buoyant growth in the underlying economies and underlying businesses did not dissipate, did not go away and the pace of investment deal while may have contracted in 2009 but has remained steady. In that context, we see very buoyant activity and growth in all of our EMs, Latin America, Asia, Africa, all included.
That is reflected in the pace of investment making that both our businesses be it Aureos on the SME side and Abraaj on the larger PE side have been undertaking over the last several years. Our pipelines and our aspirations are for 2012-2013 certainly speak to very buoyant deal making activity.
Q: Would that mean that you are not looking to raise any fresh money or you are not sitting on any cash considering that the deal momentum has kept up for you?
A: On Abraaj side we are on the private equity side, we are on our fourth fund. We started with USD 120 fund 2001 vintage followed by USD 500 fund 2005 vintage USD 2 billion 2007 vintage and now a 4th fund which is also USD 2 billion where we are substantially raised to the tune of about USD 1.7 billion. Our larger private equity investments on the PE side will be made in Asia, etc through that vehicle. Moreover, when you look at Aureos business, Aureos has regional dedicated funds be it Africa, Latin America, South East Asia, and in case of India it is a country fund and they have invested those funds well. They are in the process of raising a successive South East Asia fund for example where it is going to be a USD 200 million-targeted fund.
They have got committed capital raised to about USD 97 million. Another USD 40 million allocated in terms of soft commitments. In the next 3-4 months we should comfortably be able to close that fund at USD 200 million. It is a stated target and similarly we will be raising a successive fund around India as well shortly. The existing India fund is now fully deployed as invested well has reached three exits with average multiples of cash of 2.5 times. In last 12 months, we made about three investments in India. So it has been a good track record of both deal making and exit making. It is a good team of about 10 plus professionals in India. Therefore, we are confident about our fund raising abilities.
Q: It has been a rough couple of years for India. What excites you the most about India? I am referring to specific verticals or business sectors that interest you? Do take us through your fund raising plans specific to India as well?
A: To state the obvious India is attractive for all the reasons we know – demographic size, the consumer driven story all of that is real, all of that is not going away. Hiccups come along the way be it up turns, slowdowns. To be very honest the current slowdown is a momentary period where perhaps it is more attractive from a deal doing perspective. There is less liquidity in the markets, entrepreneurs, promoters are more willing to talk, and valuations are perhaps a bit more sensible. It is not all bad from our perspective. Remember we invest over any fund that has a four-year investment period. Hence, we take our time to originate and to transact; we are not in a rush to do so.
Overall, where India is today – we actually see it as quite attractive from the deal making perspective. Now the key differentiate for us in India, America after this coming together of the Abraaj and various platforms, it is going to be the fact that given the global presence we have, India is a competitive space – there is no denying that. Therefore, it is all about what differentiation you can bring to the table. And when we look to originate the larger PE transactions we will certainly aim to leverage our global points of presence. We have a footprint now, which is the largest within the emerging market private equity SME space.
We will aim to leverage that footprint when Indian corporates want to access Africa, Asia, and we will do that in a targeted concerted manner, drill down into sectors where it makes sense. On the SME front, the SME story and space in any cases is a less crowded space in India like in other emerging markets. It is a space where banks do not play as readily. It is a space where funds are active, not in the same quantum. The ability of our India team to originate quality deal flow is evident by what they have been doing over the last 4-5 years. They have seen a good spat of deal flow at good valuations.
There are good growth prospects. They have been able to exit at good valuations. It is a good story, the focus on the SME side will continue, and that Aureos will stay true and committed to its SME platform. The sectors are anything that broadly touches the consumer be it manufacturing, be it services. We like social infrastructure. Both Aureos and us historically have done a lot in health care; have done a lot in education. We will continue to look at that.
We like the agro space, we like the logistic space surrounding the agro space and certainly around agro natural resources, infrastructure. We will play the supply chain game extending from India up into other parts of the world as well, EM world.
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