Indian private equity fund managers are making less international trips these days, instead they are busy doing fund-raising roadshows right in their backyard. If the recent trend is any indication, the domestic limited partners (LP) are emerging as a significant source of capital in Indian private equity.
At least a dozen Indian funds such as ICICI Ventures, Reliance Private Equity, Renuka Ramnath-floated Multiples, Milestone Religare Investment Advisors Pvt Ltd, IL&FS Investment Managers Ltd, Kotak Realty Fund, Tata Capital and Piramal real estate fund are on road to raise domestic capital.
ICICI Venture has tapped the domestic capital to raise $200-million as the first tranche of its $500-million fund. The firm is expected to announce the first close by end October, and will go to offshore markets for the remaining part of the fund. “The liquidity in the market is good. Domestic money is becoming a predominant source,” said Vishakha Mulye, MD & CEO, ICICI ventures. With liquidity channels drying up in the West, domestic money (banks, institutions and high networth individuals) is quickly emerging as a sizeable pool of capital to power the Indian private equity gravy train.
Consider the rise of the domestic LP class in the Indian PE landscape: Reliance PE is expecting a first close of Rs 1,500 crore by the end of this quarter through funds raised from domestic financial institutions and HNIs. The ADAG-sponsored fund vehicle is targeting a corpus of Rs 3,000 crore. Aditya Birla Private equity, the PE arm of Aditya Birla Group, is looking at a first close of its $250-million mid-market PE fund only from domestic LPs. TVS Capital Funds was the first major independent private equity fund to raise a Rs 600-crore all-rupee private equity fund. The fund – promoted by the Chennai based TVS Group and Shriram Transport Finance group – raised the fund in 2008.
“The interest received from the domestic LPs for the fund has been terrific,” says Bharat Banka, MD & CEO, Aditya Birla PE.
Domestic LPs comprise of financial institutions like banks, insurance companies, pension funds and HNIs (high networth individuals). The biggest domestic LPs in India are General Insurance Corporation, Life Insurance Corporation and State Bank of India and UTI. These institutions are allowed to invest a small percentage of their assets under management in these instruments. The HNI class is also gaining traction with placement agents like Centrum Capital and placement divisions of banks like ICICI Bank actively reaching out to them.
“There are about 14-15 funds targeting to raise money from domestic institutions and HNIs,” says Munesh Khanna, Managing Director, Centrum Capital. Ramesh Venkat, CEO of Reliance Equity Advisors, told VCCircle in a recent interview. “Domestic institutions will emerge as a major limited partner class in times to come,” he says.
But, unlike the West, where huge pension funds like Calpers (often referred to as mother of LPs), university endowment funds, family offices and lastly fund of funds make commitments to PE funds, in India, the domestic LP base is quite restricted. In India, the investors are largely limited to state-owned insurance companies, public sector banks and the relatively new investors like HNIs. That may not be enough to sustain the emergence of the domestic capital in Indian PE circuit.
“More family offices fund and fund of funds should be encouraged in India. There should be a diligent benchmarking by regulators on the extent of equity that can be earmarked for an asset class like PE which can generate long-term returns,” says Gopal Srinivasan, CMD, TVS Capital Funds.
Another dampener is the inability of banks and financial institutions to commit enough to private equity due to regulatory constraints and removal of tax pass-through benefits for domestic SEBI-registered VCFs. The provisioning requirement for banks for allocations made to VCFs is as high as 150%. “Asset allocation in India is still constrained by government and central bank policies that are contradictory and counter intuitive as far as the capital and growth requirements of Indian industry is concerned,” says Vivek Sekhar, MD & CEO, 2i Capital.
Predictably, funds have to approach international investors to raise the entire corpus even if the domestic investor base is gaining traction. “It is still skewed in the favour of global investors”, said Raja Kumar of UTI Ventures. So, ICICI Ventures would approach the international markets on the back of the first close made from domestic money.
A key driver to the domestic LP story is the deepening of the secondary PE market. With this, investors can hope to generate liquidity much earlier. “Many funds today focus on secondary transactions. So, they can provide liquidity to banks and insurance companies much before the fund closure. Such exit options were not pronouncedly available before,” says Raja Kumar, MD & CEO, UTI Ventures.
But, there are concerns about the stability and bandwidth of this class of investors, particularly HNIs, given the fact that PE requires long-term lock-in capital. HNIs will have to concede about 20% of the profits to fund managers, as says the placement memoranda of the PE fund. "For any GP, the first choice is to raise capital from traditional long-term institutional capital," said Kumar of UTI Ventures.
For instance, in 2008, Darby Overseas Investments Ltd, the private equity arm of Franklin Templeton Investments, raised Rs 630 crore ($147 million) fund from Indian HNIs. Now, apparently, some HNIs have pulled out of this fund, according to an industry tracker. That is the potential downside from raising funds from individuals, who may not have a long-term investment horizon.
While many PE funds are targeting domestic capital, only a few have been successful. According to Vikram Uttamsingh, PE Head, KPMG, the understanding of PE as an alternative asset class still needs to be more advanced in India.
Typically, domestic investors are ready to loosen their purse-strings for funds, that have a good brand name and are backed by good investment teams. “Teams that have a decent track record and have exited funds in the past make a difference,” says Srinivasan.
Besides, funds with an anchor investment (initial commitment from the fund sponsor) often prove to be more attractive to investors. Aditya Birla PE, which will soon make the first close of its fund, is warehousing the group’s anchor investment till then.