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LPs now demand equal participation in deal selection through co-investments, say experts

04 June, 2014

Today, Limited Partners (LPs) are proactive in asking for increased participation of General Partners (GPs) towards their funds with more GP capital commitments, step down in management fee, among others. This being a norm in the developed markets is having its effects on the fundraising environment in the emerging markets, especially India. LPs have put their foot down and demanded equal participation in deal selection through co-investments.

These were among the observations made by panellists at the recent VCCircle India Limited Partners Summit 2014. The panel was moderated by Arjun Bawa – VP, PineBridge LP. Dignitaries like Rahul Bhasin – Managing Partner, Baring Private Equity Partners India, Jagannath Swamy – VP, Harbourvest Partners (Asia) Limited, Viswanathan Parameswar – Executive Director, Adveq Management, Ashley Menezes – MD, ChrysCapital Advisors Pvt Ltd and Paddy Sinha – Managing Partner, Tata Capital participated in the discussion. Following are some of the forward-looking observations made by the panellists: 

Viswanathan Parameswar, Executive Director, Adveq Management:

“Globally, the GP commitment in a fund is going up which is very comforting for the LPs. As an LP, I would like to see more GP commitment but that might not be possible in India for various reasons.”

Ashley Menezes, Managing Director, ChrysCapital Advisors Pvt Ltd:

“A lot of give and take between the LP and GP helps you over a long period of time. When we discuss the critical things with them, they understand the situation. I do not think an LP should screw a GP or vice versa and that is the key to a good relationship.”

“The challenge around co-investment opportunities in India is that fund managers themselves are not able to find big enough deals.”

Jagannath Swamy, Vice President, Harbourvest Partners (Asia) Ltd:

“Certain incentives provided by GPs like a step down in fee and co-investment rights to LPs help. Nowadays, LPs understand the market conditions and change of structure in riskier markets like Southeast Asia. There are LPs who are taking the initiative to change according to the underlying market condition but that has not yet happened in India.”

“A common problem amongst the global investors is that they do not understand the nature of PIPEs in India. The PIPE deals done in India are fundamentally different.”

“The management fee has taken a step down to 1 or 1.5 per cent compared with 2 per cent earlier. We are seeing discounts in the incentives post the first close of the fund as well. Thirdly, we are seeing GP commitment numbers moving up.”

Rahul Bhasin, Managing Partner, Baring Private Equity Partners India: 

“The business model in India is not appropriate and needs to change. The current system was designed for a totally different environment and eco-system. The business model in India is not designed for maximising LPs’ returns and growth.”

“If a GP follows his fiduciary responsibility then he will think in terms of higher returns and lower risks whether through public or private deals. The bubble in public markets lasts for as long as four-five years. The LP should allow his fund manager to take a call on investments and review it on a timely basis.”

Paddy Sinha – Managing Partner, Tata Capital:

“I would say an upfront strategy should be decided upon so the costs are known upfront. If the clauses between LP and GP are reasonably built in then there should be no issue. LPs prefer co-investment opportunities because it also helps bring down the fee to be paid otherwise to the fund manager. The challenge here is that sometimes LPs are not that fast or well resourced to move quickly on a deal in India.”


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LPs now demand equal participation in deal selection through co-investments, say experts

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