At a time when private equity fund managers are finding it difficult to raise capital and suffering capital call challenges from their limited partners (LPs), one of the marquee private equity funds in India has returned the capital to its LPs for greater freedom in investing style.

ChrysCapital, one of the largest private equity funds in India, has returned about $300 million from its $1.15-billion ChrysCapital Fund V to its LPs, Business Standard reported on Tuesday.

It's a significant move from the Delhi-based investment firm which started out as a venture capital fund in 1999 at the onset of the dotcom boom, and evolved into a PE fund by 2004, later transforming itself into an investment firm making open market stakes or dealing in public equities.

“This voluntary act has endeared ChrysCapital more than ever to LPs and enabled the former to get more flexibility in its investment strategy and type of capital deployment," Sanjiv Kaul, Managing Director, ChrysCapital told VCCircle. Its latest move of returning capital for freedom in investment style only affirms its role is getting larger in the public market space.

This is not the first time that a fund has returned capital to its LPs. In 2009, TPG had offered investors in its latest Asia fund the chance to cut their commitments by up to 10%, or a grand total of $420 million.

Too Big To Handle

“It’s a right move. Private equity is a relationship-building exercise with LPs. It’s better to return capital to the LPs than not being able to deploy it,” said Vikram UttamSingh, Head, PE Advisory Group, KPMG. Uttamsingh argued that the Indian PE market typically involves deal sizes of $25-$50 million and for a fund of size of $1.25 billion, it is just not rational to make investments of that size.

Also, such opportunities are not even available in the public market as even if a PE fund buys 15% into publicly listed companies and triggers an open offer, the market cap of such companies are small and often less than $1 billion, adds Uttamsingh of KPMG.

ChrysCapital raised its fifth fund in 2008, seeing participation from a host of recurring LPs who would want their returns as the life of the fund matures. It’s already close to two years and the investment firm is sitting on more than 50% of unallocated capital.

Kaul of ChrysCapital explains that this is a proactive step keeping in mind the investment climate in the country that has changed significantly since the time they raised the fund. "The valuations in the private markets are very high. The promoters are not willing to lower the valuations and would rather defer their fund raising plans," he adds. He added that ChrysCapital will continue to make 3-4 investments per year and these would be of similar vintage and quality as in the past. 

ChrysCapital's unwavering and steadfast focus on alpha (which is approximately 15% excess returns per year over the last 11 years of our investments in India) will continue, he added.

The other option for a fund of this magnitude is to do large-sized deals in the public markets.

In 2008, ChrysCapital made record investments of about $200 million into Infosys Technologies and $220 million into HCL Technologies in the same fashion.  In 2009, it invested in Mahindra & Mahindra Financial Services Ltd and Spanco Ltd via the open market route. It has mirrored a hedge fund since 2008, having made more than 10 such investments during the period, according to a data from VCCEdge.

Rising Secondaries & LP Pressures

A lot of PE funds have been active in the secondaries public equities space which has perhaps not gone down well with the LP community. "A PIPE deal in a listed company is probably alright for a PE fund as long as they have some direct influence on the company (via a board presence, or deep expertise or past knowledge of the business). However, in most cases, such a situation (of having direct influence on the invested company) is not there, making the PIPE deal as good as a secondary transaction in the public markets," said Praneet Singh, leading the India investments of Siguler Guff, a fund of funds with over a decade experience in India. 

Also, LPs often argue that dealing in public equities to the extent of secondaries does not justify the 2:20 management fee structure.

"Investing in PIPEs in the last seven to eight years worked well. But now as the funds have grown, managers in India cannot deploy funds in mid-market companies without moving their investment return needle. Thus, they have resorted to making investments in large, publicly listed companies. When that happens, I think LPs are taking a step back and asking themselves why they are giving 2% (management fee) for investments in large-cap and publicly listed companies. We understand that PIPEs in India are different from PIPEs elsewhere in the world and we are supportive of that. However, as a firm, we would rather see the manager do a PIPE transaction in a company where it can work with the management team, rather than deploy it in a Wipro or Tata or Infosys, where, in general, fund managers have little or no say. That’s like putting passive money to work, which we are not looking for when we make our private equity allocations," Rahim Penangwala, LGT Capital (a fund of funds) told VCCircle in an earlier interview.

Private Vs Public Equities

A host of PE funds are increasing their exposure into public equities. However, industry experts believe that private equity tends to be more "perfectly priced" - there are a limited number of players out there and promoters don't leave very much on the table.

“Given the volatility in the markets, adequate liquidity and the ability to take advantages of volatility are critical, and public equity is in a much better place to do that.  Public equity managers can move swiftly in and out of securities in volatile markets, exploiting dislocations that private equity may not be able to. The combination of these factors - volatile markets, transparency, and strong performance by public equity, really tilts the story in its favour,” said Radhika Gupta, Forefront Capital Management, a Mumbai based quant asset manager.

There are also talks that Chrys Capital will raise a complete public market fund for its Fund VI. “We should be able to raise our next fund after this fiscal year ends,” said Kaul of Chrys Capital.

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