US based fund of funds Vanterra Capital has completed the first close of its debut fund of funds at $152 million. The development has come at a time when private equity firms are struggling to raise money currently because of a global capital crunch. The US based fund’s final target is $300 million, which it expects to wrap up soon. The fund will have a significant allocation to India and will focus on the lower middle market and the growth equity segments. VCCircle’s Shrija Agrawal caught up with Shad Azimi,Partner and founder of Vanterra Capital, to know about their fund raising experience, strategies and expansion plans, particularly for India. Azimi was formerly a principal at NYL Capital, a $7 billion private equity programme sponsored by New York Life Investment Management.
Azimi believes that institutional investors demand more transparency from investors now, and that they are beginning to realise that a branded fund does not necessarily deliver high returns. Vanterra is excited about the overall long term story of India and would prefer to make co-investment in blue chip companies with significant negative control rights because their view is that the best asset in India are not necessarily for sale. Excerpts:
How did you find the fund raising environment?
We had a unique strategy and received a lot of excitement. We didn’t go to a very broad market. We went to a very exclusive group of people whom we proactively sought to have in our network.
It looks like much of your LP base is drawn from Middle East? Is it?
It’s a mix between Middle East, the US and others.
What brings you to India? And how much of your fund would be allocated to India?
We expect India to get a significant allocation. Our strategy is hybrid in nature as we will make direct investments, besides in funds. We will take a macro economic view of the world, have a very thematic approach, and then identify markets that we want an exposure to. We will proactively find the top private equity funds operating in their respective niches. We take generally one or two funds within a region, and then provide them with significant capital. We are proactively targeting India (besides other emerging markets).
What are your views about India now?
We think that India will continue to be a massive growth engine for the world economy and we are taking long term views on the markets that we focus on. We are not taking short term, 6-month or 1-year views on our markets and we think that private equity long term assets would not be affected by the short term fluctuations.
Any particular sector that you would like to invest in India?
We don’t do real estate, and we are not into venture capital, this is not our expertise. We focus on the growth equity segment, we will be opportunistic as far as sectors are concerned. We prefer a focus on the India advantage sectors.
What do you mean by that?
India advantage sectors are the sectors that are going to benefit from the emergence of the massive middle class population. Sectors that benefit from the domestic growth as opposed to purely an outsourcing play.
Should’nt you be looking at opening an office in India also?
NYLIM Jacob Ballas is our partner in India and we want to leverage that network. NYL Capital (my previous organisation) had seeded this fund a long time ago. Now they are on their third fund and have raised over $400 million.
You have been in the private equity industry for quite some time now, what do you think about this asset class going forward?
We are focused on the lower middle market segments and the growth equity segments where growth and value is driven from inherent growth in the country and the professional conduct that private equity brings to the company. I think my view on private equity over the next few years is that the next couple of years could be some of the best vintage year for private equity returns we have seen in a long time because of the depressed valuations. However you have to deploy the capital very prudently in the next few years – in defensive-oriented investments. There will be some very good winners in private equity.
What are these defensive oriented investments?
I guess companies that are not leveraged and those who rely less on their own market growth and more focused on capturing market share.
Talking particularly about India, where the private equity markets are not that mature, we are seeing a lot of firms deferring their fund raising plans. Any thoughts?
I think the bar for people launching private equity funds is going to be much higher. So I think it will be much more difficult for the first time funds to get seeded and there will be a focus on identifying the best of class managers.
Are the institutional investors’ attitudes to private equity changing?
There’s much more sophistication in the institutions that invest in private equity and institutional investors demand more transparency. Also, institutional investors are beginning to realise that branding does not necessarily correlate to high returns. We will focus on small managers who because of the greater alignment of interest have historically out-performed a large cap fund.
What are the new investment strategies that you see in emerging markets?
What’s very important to know is that you cant take a western style paradigm of investing and force it into emerging markets. Each market is entirely different, for example, in India, our preference is to invest in managers and make co-investment in blue chip companies with significant negative control rights because our view is that the best asset in India are not necessarily for sale.