2010 Key Trends From an LP's Lens

03 January, 2011

Operational Engagement is a theme that made it to the limelight in a big way this year. Almost every GP we have met has demonstrated the intention of building or strengthening their team with industry and operational skill sets. Why is value- addition more pronounced than ever before?

To a large extent, it reflects a maturing private equity ecosystem, as well as the intent to remain competitive with so many funds in the market. The most obvious question is how does this kind of active engagement model apply in the context of minority control? Does having operational skills sets truly give one an edge when negotiating deals with entrepreneurs? Is it more effective to hire operational consultants on a project by project basis, or in-house operational professionals? And what happens if there is a partner with industry specific expertise, and as a consequence, there is the pressure to do deals in that space? 

Fund sizes are also changing. In general, Fund IIs and Fund IIIs are getting larger. First time funds raised at $100 million-200 million in 2006 and 2007 are expanding to become $250 million to $350 million in size. Spin-out teams are raising anywhere between $100 million to $400 million. Larger players ($500million plus) are likely to remain large and unlikely to reduce the size of preceding funds. What does this mean for Indian private equity? What has worked and what hasn’t? Some GPs explain that it is much harder to grow a company that is $20million in revenues to $100 million in 3-5 years, therefore the shift to larger deals. What does this shift/expansion of fund sizes imply for returns?

 

Exit momentum has been very positive this year. Are we going to continue to see more secondary sales going forward? Is it because large private equity funds paying premiums over strategic buyers? For 2006 and 2007 first-time entrants into the Indian private equity space, some portfolio companies could have faced unforeseen execution challenges, may still be too small for an IPO or have not yet fully recovered from the global financial meltdown. Will it be possible to raise a second fund without any exits?

Strategy dynamics have also evolved in the last five years. Lately, we have been seeing more players steer towards more ‘platform’ style deals. Platform style deals are when the GPs partner with proven management teams to create companies from scratch and rapidly scale them. These deals typically happen in sectors with supply constraints where attractive investment targets are hard to come by. This method of ‘creating’ deals mitigates the risk of high valuations. We are also seeing increased interest in doing control transactions. The ability to ‘control one’s destiny’ has become a mantra for certain GPs in the market. Targets are typically businesses with succession issues, and first generation entrepreneurs. Does this point to some kind of a paradigm shift in Indian private equity? How different are the risk/return profiles for control and platform style deals? 

 

All in all, 2010 has been an exciting year for the Indian market. As private equity partnerships continue to refine their strategies and become more sophisticated, rest assured that limited partners are on the same path. 


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2010 Key Trends From an LP's Lens

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