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IIFL deploys bulk of $1.2 bn pre-IPO fund in record time with a strategy shift

IIFL Asset Management Ltd has deployed more than half of the total corpus it raised for backing private firms floating initial public offerings (IPO) within a year.

At nearly Rs 4,500 crore ($660 million), this marks one of the quickest deployments by a fund house, in the peer group of Indian mid-market private equity firms. Mid-market PE firms, which typically have a corpus of around $500-700 million, tend to deploy the money over a period of three to four years.

"The fund has made commitments for another Rs 500 crore which may fructify over the next few months," IIFL Asset Management CEO Prashasta Seth told VCCircle.

The IIFL Special Opportunities Fund was raised via multiple vehicles to strike pre-IPO transactions as well as participate in both anchor allotment and during the IPO itself. It raised capital primarily from ultra-rich individuals. Over the course of last year, it scooped up around Rs 8,500 crore ($1.25 billion) in total. The firm had started deploying the money a year ago while simultaneously raising funds.

The firm was striking smaller deals in the beginning. However, soaring investor interest prompted it to upsize its corpus and make larger investments while sharpening its strategy as IPO market volatility increased. It is now making fewer but larger investments.

Its two largest investments include bets on the National Stock Exchange and NSDL egovernance Infrastructure Ltd; the fund has put in Rs 1,000 crore each in the two companies.

As VCCircle reported earlier this year, IIFL Special Opportunities Fund bought shares in the NSE in several tranches from various investors. The NSE has said it will go public later this year, but the final timeline is not yet clear.
IIFL's fund acquired a minority stake in NSDL e-Governance from IDBI Bank earlier this year.

Other companies in which the fund invested include Bikaji Foods, Indian Energy Exchange, ICICI Lombard General Insurance Company, Reliance Nippon Asset Management Company, HDFC Life Insurance Co., SBI Life Insurance Co. and Nazara Technologies.

Weak IPO sentiment

The fund began investing in pre-IPO situations at a time when there was considerable euphoria around IPOs. A large number of companies sold shares in the primary markets in 2017, raising a record $10 billion. Many of them listed at a premium.

Several companies are planning to list this year as well and many have been appointing merchant banks and securing regulatory approvals. However, the momentum has weakened.

"Market sentiment has changed with respect to the visibility of IPOs," Seth agreed.

Companies are getting more cautious about listing and as a result pre-IPO deals are taking a lot more time.

However, this is making valuations more attractive for funds like IIFL, Seth felt.

Unlike traditional PE funds, which have a lifecycle of eight to 10 years within which the fund managers have to deploy the money and return it to the investors, IIFL's fund has a four-year life and it needs to exit the investments by 2021.

Apart from IIFL, diversified Edelweiss Group has also raised a similar fund.

The Edelweiss Crossover Fund was raised in November 2017 with a corpus of around $270 million. The fund would invest in companies that are on the verge of going public.

Axis Asset Management has also raised a pre-IPO fund, as per a Mint report last year.

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