Asian alternative investment fund managers and investors sported their best smiles during their annual community jamboree in Hong Kong at the sixth annual Super Return Asia Conference held last week. But beneath the veneer, there lay doubt, trepidation and a question mark regarding the Indian private equity (PE) fund managers who seem to be falling out of favour with the limited partners (LPs) or those with the actual moneybags as they have not necessarily done a good job at keeping them happy.

The event saw about 500-odd participants with all the prominent Indian PE fund managers present – Ajay Relan (CX Partners), JM Trivedi (Actis), Rahul Bhasin (Baring Private Equity), Renuka Ramnath (Multiples Private Equity) and Anil Ahuja (3i Group), to name a few.

A quick pointer that suggested the LPs’ disappointment with Indian PE fund managers was a poll conducted during the opening panel discussion. In response to a poll question on which Asian giant would see the maximum share of funds, China (43%) claimed the top slot, followed by Indonesia (26%) and India (11%).

India has plummeted to the third position with the LPs’ appetite towards the region falling from 18 per cent in 2009 to 14 per cent in 2010 and further plummeting to 11 per cent in 2011. What’s more, India has been beaten by Indonesia which has emerged as the new darling of PE investors. Incidentally, it was not even a part of the poll in the past two years. Given the herd mentality of the LPs, such share of fund managers finding Indonesia attractive only goes to show that it is a good idea to be a PE fund manager in that country.

This overwhelming interest of LPs towards private equity in China was somewhat overpowering and in a sense, overshadowed Indian PE fund managers. "The risk in China is going down. It falls at a different point in the curve," said Michael Byung Ju Kim, Partner, MKB Capital Partners (a buyout private equity specialist in the Asia-Pacific region with $3.7 billion in capital under management), while talking about the risk-return curve for Asian PE markets.

In contrast, the decline in the appetite for Indian fund managers is driven by disappointing performance, team changes, ‘me-too’ funds, expensive entry valuations, investment overlap with other GPs, generational issues and relationship fatigue.

But the key is exits and how Indian fund managers have failed to focus on exits, leave alone delivering good ones. For those fund managers currently on road to raise money, it is but clear that you can’t sell stories anymore, you can only sell exits. “The expectations from Indian fund managers and data do not match up. PE in India has done a shoddy job with realised returns being single digits in percentage,” said Brijesh Jeevarathnam of Commonfund Capital, a global investment management firm with meaningful exposure to private equities.

There is a general view that there is too much capital and there needs to be consolidation in the industry. With fundraising now proving to be extremely challenging for Indian fund managers, it is expected that a lot of funds will shut shops. "Industry will be cleansed by 2013," said Anil Ahuja, MD of the 3i Group.

Some GPs who have raised monies in the past and not hitting the fundraising front soon voiced their opinions regarding the LPs and said that the LPs were to be equally blamed if there’s so much capital now and that they "backed anyone and everyone as they did not want to miss on India."

However, LPs have now realised that India is not a beta play and that one needs to cherry-pick the fund managers. This means that money will still follow fund managers with proven track records and differentiated strategies. In terms of outlook, the overriding sentiment was that of cautious optimism and most aptly so, for Indian PE fund managers. "People are trying to be disciplined about entry points. Reporting standards are also improving," said Saguna Malhotra, managing director (Private Equity) of Stanford Management.

At a broader level, fundraising levels are set to increase for Asian private equity. "Our allocation to private equity has increased 500 per cent over the last 15 years. And there is more room to grow by 20-30 per cent in the next five years," said John E. Schumacher, chairman of New York Life Capital Partners.

In fact, a response to a quick poll had shown when the Asian PE market would possibly overtake the US PE markets. More than 40 per cent believed that such change would occur within the next 10-20 years and this was consistent with last year’s poll results where around 43 per cent of the participants believed the same.

Thus, the industry is hopeful that private equity will remain an attractive asset class for investors. That this sector has the ability to come through the crisis of the past few years and still continues to outperform the public markets should attract new capital and increased allocations.

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