The Hindu Business Line : Global fund managers eye bigger chunk of mid-cap pie

JPMorgan Chase & Co, which is planning private equity investments targeted at the Indian mid-cap segment, and Lotus India AMC, which has just launched its maiden mid-cap fund in the equity-diversified category, are among those in the fray for a piece of the mid-cap pie.

Renewed investor interest in this space comes in the wake of significant erosion in mid-cap valuations over the past three months following offloading by FIIs in a number of these firms.

Fall in valuations

During January-March period this year, the BSE Mid-Cap index was down 37 per cent to touch a price/earnings ratio of 11.3, in comparison to a 15.5 times forecast earnings for the benchmark Sensex.

“In a falling market scenario, short-term investors tend to shift focus to larger firms, often leading to a reallocation of funding movement from mid-cap to large-caps. The resultant fall in valuations in the mid-caps space offers a good opportunity for longer term investors, such as private equity players, to step in. Besides, mid-caps have a lower threshold in a situation where valuations are under pressure, and the need for smart capital gets them to open up to the idea of fund infusion,” Mr Sanjiv Kaul, Managing Director, ChrysCapital, said, explaining the trend.

More opportunities

Besides, investment opportunities in the mid-cap space have increased over the last five years, as the number of companies with a market cap of more than $1 billion has shot up from under 20 to nearly 130 firms now, according to industry players.

With a view to tapping the opportunity, HSBC Halbis Capital Management plans to carve out a long-short India mid-cap hedge fund from its main India hedge fund.

According to Mr Bill Maldonado, Head of Alternative Investments at HSBC Halbis, the new portfolio is likely to be launched in the third quarter of this year.

Lotus India AMC — a joint venture between Fullerton Fund Management Group and Sabre Capital Worldwide — recently launched the Lotus India Mid-Cap Fund, a three-year close-ended scheme that would invest up to 65-100 per cent, specifically in mid-caps which have the potential to become large-cap firms over a three year time-frame.

US financial services major JPMorgan Chase & Co, which set aside $750 million of proprietary capital in February this year for making private equity investments in Asia, is also eyeing the Indian mid-cap market.

On the radar are companies that have a market cap ranging from $500 million to $1 billion, with the proposed fund likely to consider purchasing minority stake in these companies, according to sources.

‘Growth story intact’

“Though the stocks are down and the public capital markets are drying up, the India growth story is still intact. With companies continuing to require capital for both organic and inorganic growth, private equity has become an important source of funding… You will see deal volume in mid-caps intact or even growing. At the same time, deals could get slower as promoters of these mid-cap firms take time getting used to lower valuations,” according to the Executive Director, KPMG, Mr Sandeep Dhupia.

Traditionally, large-cap stocks are associated with a comparatively lower risk of erosion in valuations and are hence considered safer bets, whereas mid-cap investments carry higher earnings risks, besides being more vulnerable to unwinding by institutional investors or pullouts by funds on global cues.

Related Stories:
Mid-cap stocks plummet on FII selling
Small and mid-cap stocks still lagging
Mid-caps go back to discount to Sensex

More Stories on : Stock Markets | Foreign Institutional Investors

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