Srei plans first PE fund for defence sector

Srei, a leading infrastructure provider and financing company, is planning to float a private equity (PE) fund dedicated to India's defence and security sector.

The fund, with an initial corpus of $150 million, is set to be the first of its kind, said two independent industry sources familiar with the development.

But even before the fund gets conceived, Srei and its listed group company Shristi Infrastructure Development Corporation Limited (SIDCL), which specialises in infrastructure development and civil engineering work, are also exploring manufacturing opportunities in the defence sector and eyeing two international companies for a possible joint venture.

Sources added negotiations may even lead to a buyout by Srei. While one of these companies is a subsidiary of Thai conglomerate Tyco Fire and Security, the other is a Finnish player. Both are into defence component manufacturing.

When contacted, Srei Infrastructure Finance Corporation Chairman and Managing Director Hemant Kanoria denied any such plans.

"We are exploring possibilities of launching two new infrastructure funds - one for large infrastructure projects and one for SMEs - but I am unaware of any dedicated defence fund."

MD, SIDCL, Sujit Kanoria, said, "Defence in India is an evolving sector, although the prospects are huge. There is still no clarity and the new policy is also getting drafted. So floating a fund now may not be a good idea. We explored the option, but dropped the plans."

But, he also said, "Financing in the defence sector is certainly an opportunity that we will also like to look into in the long and medium term. In the short term, we are exploring certain JV options in the component manufacturing area."

Considering the strategic opportunity, sources said Srei was planning to rope in other foreign partners as co-investors in the fund.

These are both strategic players as well as global financial houses that have a strong funding experience.

Talks are at an advanced stage with CSFB, Deutsche Bank and with the American military sector giant Raytheon, Dassault and Airbus of France along with Canadian aerospace bigwig Bombardier.

India's defence and security space is pegged as the next big opportunity for the corporate sector.

Already, companies like Tata, Mahindra, Punj Lloyd, L&T and Pipavav have got a toehold in the sector that is gradually opening to private sector participation.

It is a $40-billion market, which is expected to see a purchasing spree of a whopping $100 billion.

The focus of the fund, according to these sources, is to invest in small and medium scale enterprises that are involved in the sector - either as equipment manufacturers or as component and ancillary providers - and provide them with the much-needed growth capital.

The sources said, promoters of Srei, the Kanoria family, are likely to provide the seed capital of around $25 million for the new fund.

It is likely to be registered overseas, in Singapore or Mauritius.

Sources added that Srei was likely to tap its existing global partners like BNP Paribas, IFC Washington and its partners in Russia for getting some of these global defence players as well.

With most global giants eyeing India in a big way, Srei may even use the offset clauses that exist in the different bilateral agreements to get foreign partners on board.

Sources, however, said work has already begun and the fund is likely to be housed under Srei's venture capital division or under SIDCL.

Sujit is also likely to be in the fund's investment committee. Former professionals from JP Morgan and Deutsche Bank have already come on board to take this initiative forward.