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The insatiable quest of PE fund managers for going solo

12 September, 2014

Sample this: Heramb R Hajarnavis, who leads the private equity practice for Kohlberg Kravis Roberts & Co (KKR) in India, is quitting to set up his own private equity firm; Sunil Theckath Vasudevan, partner at home-grown private equity firm India Value Fund Advisors Pvt Ltd, has quit to launch his own fund targeting a corpus of $150-200 million; Carpediem Capital Partners, a fund set up to do control deals by former executives associated of India Equity Partners, is looking to raise Rs 550 crore ($91 million); the top management at Reliance Equity Advisors, the private equity arm of Anil Ambani-led Reliance Group, is moving on to float an independent PE fund, Gaurav Mathur, managing director, India Equity Partners, also quit last year to start his own fund.

Clearly fund managers are increasingly going solo and are presumably confident about raising funds.

This is quite remarkable given that many well known names failed in this quest not too long time back. Subbu Subramaniam, who split from Baring Private Equity and went solo in 2010, has only raised $60 million. Rajesh Khanna, India head for Warburg Pincus, threw in the towel after a nine-month effort at raising $400 million for his debut fund. PR Srinivasan, regional head (India) of CVCI set up Exponentia Capital in 2010 and is yet to raise money. The list goes on.  

Besides, there is also a significant churn at various PE firms where MD/partner level executives are leaving, and some of them could be launching their own funds. Those who recently quit included Sachin Chopra, a managing director at Everstone Capital, Ravinder Singh Grewal, Mukul Nag and Rahul Raisurana, the three managing directors who had left StanChart PE after the firm downsized India operations, and Gulpreet Kohli, managing director and one of the key partners at one of India’s largest PE firms ChrysCapital, to name a few.

Going by industry grapevine, some of them may be headed towards setting up their own firms.

Now if we have a bunch of new funds, clearly things have changed? Or have they?

Let us see how well founded the optimism is, and whether it is shared by the LPs, who will ultimately write the cheques.

Much of the optimism is based on the seemingly improved appetite for investing in India. However, this sentiment may be premature as the perennial India specific PE problems are still alive. We still have an ever-increasing overhang of assets waiting to be sold. So is the pressure to return capital to LPs in face of limited chances to profitably exit big investments from the boom-year vintages. 

The IPO window is yet to open up. We are only seeing some opportunistic open market exits against the backdrop of an uptick in the markets. However, what LPs need is realisation of gains through meaningful exits and actual cash-on-cash returns. 

It is difficult to ascertain how long the perceived improved investment appetite towards India will last. It should be seen how LPs assimilate this trend of teams breaking out and going independent. LPs – and the ones more initiated with the Indian private equity scene –  do not  necessarily like teams breaking out. The effect is more pronounced for home-grown fund managers as for global funds; the MDs of Indian offices need not care so much about the fundraising as it is taken care of by the global machinery. LPs see breakouts as “failure of alignment” within GPs or “betrayal of the trust” that they have put in them as they invest behind teams and more often than not money goes away with people.

Based on our conversations with the LPs, here are a few things the aspiring fund managers may want to take note of:

a)  Getting the team right: investors want to see several people that have worked together in the past broadly on the same strategy that the new fund will focus on 

b) Often repeated but extremely critical “track record” : Having a great track record is one thing, but being able to prove it to investors is another. LPs are doing multiple references for first-time fund managers

c) Counting the kitty beforehand: Identifying potential targets to show investors is essential in raising a fund

d) Being different and not just for the heck of it: having a highly differentiated strategy and not just another “me too” offering is essential to raising a first-time fund. Public market investing or early to mid-stage technology investing is the new popular strategies courted by private equity fund managers 

e) Skin in the game is a must: a commitment to a fund from a company’s own partners, commonly known as skin in the game, is a good way to show that the team has confidence in its own offering

g)  Deal-by-deal financing method: this is a new trend being seen in the Indian PE scene with many first-time managers employing a deal-by-deal financing model to pay for acquisitions before attempting to raise a fund. This gives investors the right to look at the businesses before they invest in them, increasing the likelihood of a manager raising money

h) Co-investment opportunities for LPs: increasingly, LPs are making direct investments into companies alongside GPs to avoid paying management fees and carried interest and to have greater control over their investments.

One thing which remains a mystery to us is whether the ‘2 and 20’ model (2% management fees and 20% carry) will change. LPs seem to hate it but somehow they still end up investing on these terms. Partially, this fee and carry structure creates the ‘significant upside and limited downside’, which gives PE its irresistible pull.

Let me end by saying something that is bleeding obvious but still worth repeating. Capital migrates to the best opportunities and capital allocation mistakes do get corrected over time.  So here is the big question: Can these aspiring fund managers convince the LPs that Indian private equity is the best- performing asset class over the long-term?

We are as keen to know the answer as you and will keep you updated.

Also Read

When investors clash with promoters

In defence of Indian private equity, well almost! 

New PE mantra is buy & build; Will it pay off?

(Shrija Agrawal is Managing Editor of VCCircle.com.)


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1 Comment
Anonymous . 3 years ago

Good article. Few comments:

1. Many times “starting a new fund” sounds a good reason for an exit; exit may be driven by various “other” factors

2. Starting a new funds are also driven by lack of carry (most of the PE professional haven’t seen carry owing to its back end structure) or a global investment process (who have no clue of ground realities)

3. Low return may also be primarily driven by lack of intellectual honesty (deals could be driven by various objectives which may conflict with LPs interest)

4. Key challenge for new funds is not only to raise first fund but the second/third fund where fund performance, team continuity etc become key success factors (only some of the funds would survive)

Hopefully, Indian PE industry will go through Darwinian process like any other industry !!

The insatiable quest of PE fund managers for going solo

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