• Nearly all Fund III LPs returned, with family offices, endowments, Japan getting larger allocations
• Kedaara kept fund below USD 2bn to avoid competition with global, pan-Asian GPs
• Soaring public markets are challenging PE deal-making, driving PE exits

Kedaara Capital has closed its fourth fund – and the largest PE vehicle raised for India by an independent manager – on USD 1.74bn with family office, endowments, and Japanese capital more prominent than last time. It reflects a shift in the existing investor base as only two new names of meaningful size joined the LP roster, said Manish Kejriwal, the firm’s founder and managing partner.

“Those additions are investors that wanted to come into Fund III, but because it was raised in the middle of COVID in 2021, they couldn’t conduct on-site operational due diligence,” he explained.

“We went out to existing investors in December and January and we were planning a first close in April or May before contacting new investors. Given the global challenges around distributions and how the denominator effect has impacted many LPs, I thought some might drop out and the fundraise would take the better part of the 2024 calendar year, but we had an almost 100% subscription rate.”

Rather than a first close, Kedaara has completed a first and final close in three-and-a-half months, exceeding the USD 1.5bn target and the USD 1.08bn raised for Fund III. The total also surpasses the USD 1.4bn ChrysCapital Partners collected for its ninth vehicle in late 2022, although that manager is expected to return to market with Fund X later this year seeking at least USD 2bn.

Kedaara has received strong support from Canadian pension funds since its establishment. While North America still accounts for the largest share of Fund IV on a regional basis, several other investors – including a couple of family offices – are at near parity with peers from that geography in terms of individual commitments.

To some extent, this is the result of allocation cutbacks by Kedaara that focused on larger investors. Much of the step-up in capacity from the previous vintage was shared among existing mid-size investors, who went from USD 25m-USD 50m to USD 50m-USD 100m.

Excess demand from core LPs meant that rupee capital could not be accommodated. Kejriwal noted that sourcing 20%-30% of the corpus from local investors represents an attractive long-term goal – provided it comes from institutional players like insurance companies or sophisticated family offices instead of the mass affluent retail segment. “The challenge in that channel is that the private equity product is normally so mis-sold,” he explained.

Kejriwal offered two reasons for staying below USD 2bn. First, Kedaara employs a European waterfall for carried interest and a larger fund might lead to team members waiting 10-12 years for their payouts instead of 6-8 years. Second, the manager wants to remain in India’s middle market, away from global and pan-regional private equity firms.

“If you’ve got a USD 10bn fund, most of the time you can’t write a cheque below USD 500m. I would rather invest USD 150m-USD 200m, help companies become successful, and then sell them for USD 1bn, which is the sweet spot for the pan-Asian funds,” Kejriwal said.

As in previous vintages, Kedaara will pursue control and minority investments across financial services, consumer, technology and tech services, and pharma and healthcare services.

Headcount now exceeds 60, including investment, operations, and back-office teams, up from about 40 at the start of Fund III. Investment professionals are divided up into sector groups, ultimately answering to the three founders and managing partners, Kejriwal, Sunish Sharma, and Nishant Sharma.

Last month, the firm acquired a majority stake in ice cream maker Dairy Day, facilitating exits for existing PE and angel investors. A deal involving education specialist K12 Techno Services followed a similar template, but financial data analysis business Perfios was a minority transaction, partly due to an unwieldy cap table. The K12 and Perfios investments closed last autumn.

“Assumptions that buyouts deliver better returns than minority deals don’t necessarily hold true in economies like India, where the underlying basis of value creation is growth,” Kejriwal noted.

Regardless of deal type, elevated valuations are making them hard to do. India’s surging capital markets are the main competitor, with entrepreneurs happy to turn down private equity proposals in the expectation that they can achieve a higher valuation on IPO without ceding control.

On the flip side, it is an opportune time for exits. One Kedaara portfolio company, supermarket operator Vishal Mega Mart, is being prepped for an IPO and Kejriwal expects more to follow this year. Public markets are not the only path to liquidity, however, with financial sponsors and strategic investors also hunting for assets.

“We do see more of the pan-Asian funds because they are pivoting away from China towards India and Japan, but India is becoming more important for multinationals as well,” he said. “Control deals most likely end up in trade sales and minority deals in IPOs. But financial sponsors could pick up either and we do see situations where control deals go public.”