Motilal Oswal Private Equity launches a new Rs 4,000-crore AIF; should you invest?

Motilal Oswal Private Equity (MOPE) on Tuesday launched a Rs 4,000-crore private equity fund India Business Excellence Fund IV (or IBEF IV) – to raise capital from domestic and global investors. The fund will focus on providing growth capital to the mid-market segment in sectors such as consumer, financial services, life sciences and niche manufacturing.

This is the fourth fund by the MOPE, which has been investing in the Indian private markets since 2007.

The fund has been set up as an alternate investment fund (AIF Category II) registered with the stock market regulator Sebi.

The fund will prefer companies with new-age business models and first-generation entrepreneurs. MOPE is hopeful it will get attractive deals in the tier-2 and tier-3 markets in a competitive environment where more firms are chasing a smaller number of companies.

MOPE expects to achieve its first close before December 2021 and conclude fundraising within 9-12 months.

Motilal Oswal group itself will be investing 18-20% in the IBEF IV, said Vishal Tulsyan, Managing Director and CEO of MOPE. “Adhering to the philosophy of ‘high level of skin in the game’, the group & team’s commitment to IBEF IV is expected to be 18-20%.”

The fund expects to generate an internal rate of return (IRR) of over 30 per cent. “Our previous funds have clocked 27-28 per cent returns. Now that we have more experience, we may garner an additional 2-3 per cent over it,” says Tulsyan.

Should you invest?

The answer depends on the fund’s suitability to your portfolio. You must have an investment philosophy in terms of how much exposure to the fund is needed. “The fund falls under an aspirational bucket of capital allocation. Investors should consider it only if the investment policy permits it. Avoid violating your investment policy,” VR Wealth Advisors founder and CEO Vivek Rege said.

If you do not have an investment policy, it is essential to have one. “Approach a seasoned advisor who operates in fiduciary capacity,” he says.

MOPE has not disclosed information around the minimum holding period and the costs involved. Rege informs that the management fees for similar categories are in the range of 2-5%.

“One also needs to factor in performance fee of 20% over the hurdle rate of 10% on exiting the portfolio investment made by the fund. Past offer document provides for up to 5% of the management fee. Custodian fees will be on actuals if charged,” he says.

The amount of exit load is unclear too. Past offer document suggests an exit load of ‘up to 25% of the net asset value of the investment based on the valuation report not older than 8 months from the date such request was made by the client or up to 25% of the client’s investment, whichever is higher.

One must gather all information around fees, minimum investment tenure, and exit load before one invests in IBEF IV.

So far as risks are concerned, illiquidity is the major concern. You may not be able to redeem your money easily once invested. Apart from routine market-linked risks, the fund’s concentrated or non-diversified nature is another key point to take note of, says Rege.