The Indian private equity (PE) industry is going through a tough phase. Many investments made in the economic boom years, now look severely challenged and PE portfolios need to be readjusted. In such a scenario, a shake-out may be the right thing to happen, said Piau-Voon Wang (right), Partner, Adams Street Partners Llc., a global PE fund of funds that has $20 billion (Rs95,600 crore) in assets under management.
Wang, who leads Asia investing of Adams Street from its Singapore office, said in an interview that he is looking at buying secondary stakes in Indian funds at attractive valuations. Edited excerpts:
When did you start looking at India?
We started looking at India on a dedicated basis 10 years ago. However, we made our first investment in India only in 2004. We were the first fund of funds in ChrysCapital III when we invested in them. We have a couple of active relationships in India through dedicated Indian funds or global or regional funds. We invest $1.5-2 billion every year globally. Out of that, 10% is invested in emerging markets, where India along with China remain the major focus markets.
Do you also make an entry into funds by buying out existing investors?
In terms of our secondary efforts in India, we did a transaction in 2007. However, the trend has moved on a little. The initial thesis of doing secondaries in India had to do with local banks needing to reduce their private equity exposure to comply with Basel II (accounting standards for financial institutions globally). They needed to adjust their capital base as the capital adequacy requirement is much higher under Basel II for PE exposure.
We did a secondary in UTI Ventures. There were two transactions in the same fund. Up to 40% of our fund can be used to acquire secondary interests. That was our focus initially, buying secondary interests from local institutions who had to sell for regulatory reasons.
Now the dynamic has changed slightly for the next 10 months or so. With the challenges in the global fund-raising, we are seeing Indian fund positions being sold by Western investors in Europe or the US.
What type of funds would you acquire a secondary interest in?
We only acquire interests in those funds which we think highly of. So, it’s a very targeted approach. Some of the best quality names in the Indian PE managers are actually up for sale. So, there are opportunities which are very good and of high quality.
Which are the funds in India up for sale?
Secondary interests are in the funds which have already been raised. Many funds have been raised in the last two-three years, which include both big and small venture funds, growth funds and large private equity funds.
How are the valuations done in the secondary PE market?
It’s a function of the individual deal dynamic, so I would not like to put any number to it. But you will be surprised that the markets have moved from premium NAVs (net asset values) to discount NAVs. This is largely the function of the downward trends of underlying valuation. Most of the funds in India have public equity exposure and the valuations have come down from the point of entry.
It is also dependent on why a seller wants to get out. For instance, those who have liquidity problems want to get out of future commitments. There are also investors who just want to manage their exposure and are looking at strategic balancing of portfolio. This is happening now because of the turnaround in the markets, which has forced many institutional investors to (have a) relook at their portfolios created in 2007-08. That creates an opportunity to acquire assets that at least look cheap on paper.
How important is India for you as a market?
We are a global PE player and have a long-term commitment to India. We will be looking to build a portfolio of active fund relationships over a long term and that hasn’t changed.
As for secondaries, because of the nature of the asset class, it is a bit more opportunistic. It is dependent on demand and supply. We are at this point of time seeing a lot of supply of secondary transactions, hence we are buying into that. That will go again very quickly depending on the cycle and the market. If you look at more established secondary markets like the US, we find that when the markets’ total capital or assets under management is in a mess, there will always be some churn of LP (limited partners) interests.
We expect India to go through the same phase, but at the moment, we are looking at higher volume transactions because of the level of distress in the market.
There is a huge opportunity in the long run to value our secondary transactions in India. We should see a steady flow of churns or LP commitments. So, if you look at the funds that have been raised in India over the past three years, which is one fund-raising cycle, the typical churn of LP interest is between 3-5% of that money raised, and typically happens three-five years after that money has been raised. So that could give you an idea of what the gross realization of the secondary volume could be on a sustainable basis.
Across the LP community comprising of endowment funds, university funds and institutional investors, who is putting the maximum pressure on general partners (GPs or investment professionals)?
The pressure or the need to rebalance the portfolio is across the board. I wouldn’t like to highlight any single constituency.
The general viewpoint about Indian GPs is that they are not much experienced, growing in a benign kind of environment, and that they are gearing up for a shake-out. Do you agree?
It’s a long-term asset class and it takes time to build expertise. It takes a longer time to institutionalise them within the team or the group and repeat those successes through good and the bad times.
Your point about being benign is correct. The environment has been benign, but I struggle to point to a handful of GPs that have actually made money for investors as a fund. Making money for themselves is another thing. Even though in a benign environment, Indian PE as a whole hasn’t made money. So I think a shake-out is probably the right thing to happen.
Ultimately, we want to back groups who have proven their ability and skills in both good and bad times. This is a fantastic time for us because you can separate the men from the boys.
I think this question of Indian PE being relevant, their ability to survive has been asked often. It was asked during the burst of the Internet bubble in 2001 and the answer then was not many will survive. The same question is being asked again.
But we do have faith in the long-term viability of PE in India, but the number of players, the quality of players and the type of players would clearly have to change. People who would be able to make money, I suspect, should be the same people who made money the last time around.