A string of private equity industry executives are on the road to raise debut funds, but even seasoned veterans would swear that convincing Limited Partners (LPs), who have the real moneybags, come with a clean slate every time a new fund is launched. The going gets even tougher if external factors point towards an impending slowdown or, as it is currently the case, investors prefer to hold on to the purse strings.
VCCircle spoke to a cross-section of PE fund managers and LPs to give a lowdown on some key issues faced by debutants.
There are at least 50 Indian PE funds in the market and most of those are first-time funds – either breakouts or spin-offs from already established private equity funds. The successful fundraising by a few India-focused private equity firms like Westbridge Capital and Nalanda Capital has drawn attention towards first-time fundraisers and whether they can repeat a great run with the LPs.
Incidentally, both Westbridge and Nalanda are breakouts in the sense that they are both started by an established fund manager who broke out from an institutional private equity to set up their own shops.
However, their relative ease at raising capital does not necessarily reflect the realities that other first-time fund managers are facing or rather, the issues that they are grappling with. And both Westbridge and Nalanda are peculiar cases, feel the industry experts.
For one, both funds adopt public market strategies. Also, while Nalanda’s public market strategy has proved to deliver good returns for the fund, Westbridge Capital is a team with a strong history of working together that eventually broke out, as opposed to an individual breaking out – and also what the LPs like.
“We like a team of 3-4 people spinning out, as opposed to one person breaking out and launching a fund. For instance, it gives more comfort where the team has worked together for many years and people know each other well. It is very important for the team to have stuck together for at least an entire cycle,” said Anand Prasanna, investment director of Squadron Capital Advisors Ltd, a fund of funds.
According to LPs, while it does provide an opportunity at one level, it also suggests huge team instability issues at a macro level that does not necessarily look very good for a relatively young market. “One sees a team spinning out in mature private equity markets,” said 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.
The key for first-time funds to be in the business is to get an anchor LP. However, LPs feel that Indian PE funds are not doing much ‘thinking through’ here and not planning their moves in the right direction.
According to a Hong Kong-based LP, those independent fund managers in the past, who were successful in raising money, were able to do so because they had planned out their fundraising process, particularly their anchor LP base, before breaking out.
The successful fundraising by Ajay Relan, former India head of Citigroup Venture Capital International who founded CX Partners, and Renuka Ramnath, former ICICI Ventures head who started Multiples Private Equity, attracted a lot of PE industry professionals to go solo and set up their own shops. “But it was not as easy as they made it out to be,” said a Hong Kong-based LP citing examples of Ramnath and Relan.
“I wouldn’t be surprised if the majority of them did not get funded, simply because the capital is scarce and a lot of them being first-time funds, it’s a tough issue,” added Sambanju.
With General Partners (GPs), the fund managers who run the PE firms are now facing a tough time raising capital. Some are even willing to give up some economics or GP control in order to land an anchor LP. But that, generally speaking, doesn’t fit very well with a lot of LPs. “The question, therefore, arises as to who really controls the investment decision – is it the GP or this anchor LP,” Sambanju argued.
Getting an anchor LP has to be a well-informed choice. If that anchor LP doesn’t have a good profile, it does not go down too well with the rest of the LPs. However, if the GP lands up with an anchor LP who has a good pedigree, it also works in favour of the GP.
While LPs have their valid concerns, GPs feel that they are being pushed to a state of helplessness. LPs want these first-time fundraisers either to get a good anchor or to show them some investments that they have done as GPs in the past.
“It’s a chicken-and-egg situation,” said Jayanta Banerjee, chief executive of ASK Pravi Capital Advisors and a former ICICI Venture executive. Banerjee, founder of Pravi Capital, partnered with ASK Group, a wealth management firm, to launch the maiden PE fund worth $250 million. Both the parties are sharing the economics of the business at an asset management level.
Other Pain Points
Such trends only re-affirm that all is not well at the fundraising front. There are also developments signalling consolidation in the Indian PE industry. According to experts, the PE industry has a long tail and while it is difficult to be forced out of business, some fund managers may not be able to raise follow-on funds and can only manage their portfolio companies. In fact, terms like ‘zombie funds’ are already doing the rounds in the industry.
Besides these issues, the great wave of returning funds with established PE fund houses coming back to raise new funds in 2011-12 will provide a different sort of barrier to entry as investors focus much of their attention on cleaning up their existing GP relationships.
All big brands, especially those focusing on their Asia affiliates, are already out in the market. Also, capital has a way of migrating to the best opportunities and the industry seems to be convinced that fundraising timeframes for most of the GP community will remain extended in the coming year.
Hence, the competition for start-up-funds is only going to increase. The bar is high and LPs will have many viable fund choices across sectors, strategies and cap sizes. Fundraising for most of the GP community will take longer than it took in prior vintages and leak into the second half of 2012 in many cases, feel industry insiders. As Menka Sajnani, VP (India investments) of Auda International very aptly puts it, “At times, too much of variety is also a problem.”