Five years after the onset of the financial crisis, Limited Partners (LPs) have come to realise that private equity is no longer an asset class with no questions asked. Forget waning allocations to Indian private equities or China losing its place as the darling of the emerging market PE investors; the private equity model itself appears to be in a state of flux and is facing internal backlash from the decision makers within LPs. The latest Global Private Equity Barometer from secondaries specialist Coller Capital reveals that at 43 per cent of endowments and foundations and 37 per cent of public pension funds, private equity faces hostility from senior or ‘influential’ individuals, who believe their organisations’ allocation to private equity should be reduced or removed entirely. The survey captured the views of 140 PE investors from around the world during spring 2013.

"Investors have come to realise that there is growing skepticism around the private equity model. The perception that private equity as a product of absolute returns is proving to be a myth as it is a model that is very cyclical,' said Hiro Mizuno, a partner at Coller Capital, over the phone from London. Mizuno said such skepticism is more pronounced for younger emerging markets.

"Fighting against private equity skepticism is a tougher exercise in younger markets like India than in the US where there is a better understanding of the cyclical nature of the business model," he reasons.

Such opposition is not without a reason as the survey findings suggested that just 13 per cent of investors had received net returns of 16 per cent or more by the first half of 2013, compared with 45 per cent of investors in 2007. Consequently, one in three LPs are slowing the rate of their new PE commitments and about one in 10 are selling PE interests in the secondaries market, the survey suggested.

Action shifting westwards

Mizuno said, "A flight of capital is happening from emerging markets to the developed world." Perhaps, this could be the reason why the secondaries specialist, which usually has a separate report on Asia-specific findings, did not have one this time around. Within the APAC, LPs plan to substantially increase their investments in Indonesia and Malaysia, followed by Korea and Taiwan. The findings are pretty much in line with the recently published VCCircle Limited Partners report 2013 which surveyed about a dozen LPs who have an exposure to the region. The total fund value allocated to India was only $3.5 billion in 2012, down from $6.8 billion in 2011, according to London-based LP tracker Preqin.

Private debt funds gaining popularity with LPs

In another interesting finding, the survey suggested that half of LPs have either invested in private debt funds or are considering such investments. The number of private debt funds has grown exponentially since the start of the crisis—just 10 existed in 2009; by 2012, there were over 100—with many more in the pipeline, the report said.

Recently, in a report titled 'India: Unlocking the Demographic Dividend' by private equity major KKR's head of global macro and asset allocation, Henry H. McVey said India's nascent mezzanine market offers one of the most compelling long-term opportunities. KKR, which has $66.3 billion in assets under management, has been one of the first big buyout shops that started lending operations in India besides the staple private equity investments. The NYSE-listed buyout major, which set up India operations in 2009, lends through a non-banking finance company. It also received Sebi's approval under new AIF norms for a fund, KKR India Alternative Credit Opportunities Fund 1. Several fund houses have been gearing up for mezzanine investments in the recent past. While homegrown CX Partners is planning to raise a fund, Standard Chartered Private Equity started such investments last year.

Also Read: What do Limited Partners want from Indian private equity fund managers: Results of an exclusive VCCircle survey of global LPs

(Edited by Joby Puthuparampil Johnson)

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