60 PE Firms On Road To Raise India Fund: Will LPs Show Them The Money?

By Shrija Agrawal

  • 11 Oct 2011

As many as 60 India-based private equity firms are out on road to raise money for their first or follow-up funds, expecting to mop up over $13 billion, according to VCCedge, financial research platform of VCCircle. Indeed, the number of funds seems substantial and it will be interesting to see whether the actual investors with the moneybags or the limited partners (LPs) are going to digest it all.

First cut from LPs suggest there is going to be a decline in the number of re-ups or new general partner (GP) relationships due to disappointing performance, team changes, ‘me-too’ funds, expensive entry valuations, investment strategy overlap with other GPs, generational issues and relationship fatigue.

“There is a meaningful reduction in the appetite of LPs towards Indian PE funds,” says Jason Sambanju, managing director and co-head (Asia) of Paul Capital, a global alternative investment firm managing $4 billion in so-called secondary investments or second hand LP interests.


To be fair, LPs are facing capital constraints of their own and it is a tough fundraising environment globally. In many respects, the amount of capital allocated to private equity has not changed significantly since 2007. Some institutional investors have cut their allocations while others have stopped investing altogether.

Against the backdrop of a tough fundraising environment, what appears to be a major impediment for re-ups or new GP relationships for Indian private equity is the relatively better performance of other Asian markets, especially that of China. For LPs who consider Asia as one region for private equity allocation – India and China being its two most important destinations – China has simply outperformed India.

“On-paper, performance of Indian private equity is very good, but data suggest that China does a lot better than India in generating distributions,” says Sambanju.


According to the Asia PE Index, China has generated gross returns of 20.4 per cent on a realised-plus-listed basis, compared to 12.9 per cent by Indian PE funds. Also, while China has plentiful domestic funding avenues, India has limited channels. According to a McKinsey report, pre-IPO deals are prevalent at 28 per cent in China than an infrequent 6 per cent in India.

Also, Indonesia appears to be the new darling of LPs who are known to follow a herd mentality when investing.

Matters are getting even more complicated as nearly 70 Asia-focused funds, with India as one of their target economies, are on road to raise money. And this is happening even though private equity fundraising has hit a snag globally.


During the third quarter of 2011, 97 private equity funds reached a final close, raising $44.8 billion in aggregate, down from the $82.8 billion raised by 175 funds which closed in the second quarter of 2011, according to Preqin, a UK-based independent research firm providing data on private equities, hedge funds and other alternative investment vehicles.

Of course, things have changed for India and it is no longer a ‘must-have’ exposure from the LPs’ point of view. “LPs are looking at India from an incremental exposure standpoint. The scrutiny is high now and we want a differentiated story,” says a Hong Kong-based LP with meaningful exposure to Indian private equity.

However, China’s outperformance is not the only reason for Indian private equity woes. India, on a stand-alone basis, has not performed in terms of exits or generating distributions. With the IPO market being extremely challenging this year, a lot of private equity funds are on the sidelines and holding on to their portfolios. Also, there is a huge capital overhang or dry powder, estimated at $20 billion, which is yet to be deployed.


A closer look at the 60 funds, currently on road trying to raise capital, suggests that while there is a significant chunk of first-time funds, there also exists a great wave of returning GPs looking for re-ups. These include India’s largest PE firm IL&FS Investment Managers, Motilal Oswal Private Equity Fund, SREI India Infrastructure Fund, Beacon India Private Equity Fund, Lighthouse Funds, IFCI-Sycamore Partners and IDG Ventures, among others.

There are also sizeable numbers of first-timers including those who have had a history of being involved with PE firms but are trying their luck at going solo – Access Asset Managers, M-Cap Advisors and Arka Capital, for example.

Indeed, performance will ultimately be the measuring stick and investors will certainly have their task cut out over the next 18-24 months as they try to benchmark and evaluate the relative performance and true value-creation of GPs.


While it does provide an opportunity at one level, it also suggests huge team stability issues at a macro level that does not necessarily look good for a relatively young market, feel LPs. “One sees teams spinning out in mature private equity markets,” adds Sambanju of Paul Capital.

The key for first-time funds to be in business is to get an anchor LP. LPs feel that Indian PE funds are not doing much ‘thinking through’ and not planning their moves in the right direction. There are some GPs who are throwing themselves beyond the economics of running a PE firm or ceding GP control in order to land an anchor LP.

Some have also resorted to forming JVs with funding agencies and distribution partners, sharing the economics of the business with them at an asset management level. For instance, Pravi Capital, a domestic private equity firm founded by former ICICI Venture executives, is partnering with ASK Group, a diversified financial firm, to launch its maiden PE fund worth $250 million.

“Such trends only reaffirm that all is not good at the fundraising front. These are developments signalling consolidation in the Indian PE industry,” says an India representative of a large Asian LP on condition of anonymity.

“There is enough deal flow to suggest that all kinds of consolidation trends are here – right from funds joining hands to portfolios being up for sale,” adds Sambanju of Paul Capital, an investment management firm managing $4 billion globally in so-called secondary investments or second hand LP interests.

Having said that, it’s not all gloom and doom. According to industry insiders, private equity is a cyclical business and ups and downs are part of the game. They are also hopeful that private equity will remain an attractive asset class for investors. After the financial crisis of the past few years, the bounce-back in investment activities does indicate that there is always a silver lining when it comes to PE investments.

In the second part of this feature, we will look at how the first-timers are looking to decimate the challenges that lie ahead.


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