Limited Partners (LPs), the real moneybags behind venture capital and private equity funds, have significantly changed the way they look and evaluate
General Partners (GPs) who manage third-party investment funds in India. They have become more discerning about what they expect and want from GPs back.
Speaking at the VCCircle Limited Partners Summit 2024 in Mumbai, Akhil Awasthi, Managing Partner, Tata Capital Growth Fund, offered his perspectives on how Limited Partners, including domestic family offices, have evolved their views on alternative investments as an asset class; and shared views on what really gets the LPs excited.
An ever-changing landscape
Awasthi who runs the flagship private equity franchise of the Tata Group, recounted how the industry was a different animal two decades ago.
Earlier, the focus was whether one had a team, came with a McKinsey background, had a US MBA degree, and spoke the language of the international LPs.
“But now, performance is a key benchmark, strategy consistency is a key benchmark, team stability is a key benchmark. If these things are there, serious LPs will definitely have a look at you as a PE fund,” according to Awasthi.
Tata Capital Growth Fund was one of the four alternative investment fund franchises created under Tata Capital, the financial services arm of the group. Sponsored by the Tata Group, currently two of the four--Tata Capital Growth Fund and sector-specific Tata Capital Healthcare Fund--are actively investing.
Awasthi also touched upon the role of ESG and impact as a part of the courting process to attract LPs.
He pointed out that it is not just development financial institutions and multi-laterals such as IFCs of the world who are concerned about ESG.
“If you have a conversation with an Indian family office and you say all our portfolio companies plant trees, it could resonate with them,” he said.
Recounting an anecdote from 2008-09, he spoke about a conversation with a business family that was engaged in the construction field.
The representative of the family office asked when they will get their money back, and he replied 7-10 years.
“Then he said, I can build three buildings in that time, so it is not so good (to invest in you). Today the conversation is not that. Today, it is how much IRR (internal rate of return) can you get. What is your DPI? What is your TVPI? So, family office investment landscape has evolved very rapidly and is at a par with international investors now,” according to Awasthi.
The fund house’s mission is to sign off from a portfolio company with more robust environmental, social and governance practices than when it first invested. For achieving the same, it implements a comprehensive tool kit, covering multiple stages.
What Works
Sharing the stage in a panel with Neha Grover, South Asia Lead, Private Equity Funds, IFC; Sampath Reddy, CIO, Bajaj Allianz Life Insurance; and Kajal Ilmi, Aviom Housing Finance, Founder & Managing Director, Awasthi, also shared insights about what drives LPs these days.
“Nothing brings a smile into an LPs face like distribution; actual cash distribution into their banks. Not mark to market, not listed, liquid but saleable, or not follow-on funding round-based valuation,” he noted.
Awasthi also pointed out that one has to keep an eye on distribution of the capital and IRRs are based on that and that is what defines a relative performance.
“There are other asset classes and we as an industry pride ourselves when we go out marketing that we will do 20-25% IRR. But what is this 20-25% IRR? Is it an investment IRR, realised IRR, distributed IRR after carried interest; all these questions are there in the mind of LPs like IFC and Allianz Life Insurance,” said.
“If you are able to demonstrate for more than one fund vintage that you are able to show the amount that you have drawn down, deployed effectively and distributed back with adequate returns compared to other asset class, then that is a solid franchise,” according to Awasthi.
Other panellists touched upon issues such as track record of performance; backing first-time fund managers; exits; switching to direct from co-investments; domestic LP base development.
No VCCircle/TechCircle journalist was involved in the production of this content.
