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Rise of Star GPs, Record Exits & Niche Funds Mark PE Scape In 2010

15 December, 2010

2010 (calendar) proved to be a year of quite a few defining trends for the Indian private equity industry. Most prominently, it was a year of record exits for the PE industry, which got to see the face of money and returns on their investments. The year also signaled the rise of niche funds and new funds raised by star GPs (general partners or fund managers). VCCircle picks out a few trends that marked 2010.

Rise of the independents:  With the maturing of the private equity industry in India, there is a clear and definite trend of PE veterans going solo to set up their own ventures. In one of the most predominant themes for the industry this year, about 10 or more industry veterans turned entrepreneurs.  And, what is really being seen as a huge boost to this trend is that quite a few of these independents or ‘investpreneurs’ have been able to raise money from institutional investors for their independent ventures.  Sample this: CX Partners, floated by former head of Citigroup Venture Capital International (CVCI) Ajay Relan, made its final close at $515 million this year.  Renuka Ramnath, the investment veteran who was heading the country’s largest PE firm ICICI Venture, raised $250 million as the first close for her own PE venture Multiples Alternate Asset Management. And, those who are currently on the road are former Warburg Pincus managing director Rajesh Khanna who is raising money for his PE venture Arka Capital. Jayanta Banerjee, ex-ICICI director, has floated his own PE venture Pravi Capital, a $200 million PE fund. Varun Sahni (formerly with Acumen Fund) is floating his own venture, Global Impact Investors. PR Srinivasan or PRS is currently on the road to raise money for his independent venture Exponential Capital.  According to Sunit Mehra, MD, Hunt Partners, a head hunting firm specializing in PE, said “This is natural as the industry evolves and these experienced fund managers who are stars in his or her own right, eventually move to a more independent setup as there is more freedom for their own unique investing style and economics.”

Fundraising continues to be challenging: 2010 has been a challenging period for fund-raising as it comes after a period of poor deal activity. Lack of deal flow due to poor valuations in 2009 locked up a lot of capital leaving very little for fresh investments. About 22 funds, (14 India focussed and 8 Asia focussed including India)  secured a total of $7822.2 million in capital commitments in 2009 , a far cry from $44,535 million secured by 45 funds (33-Indian and 14 Asia focussed including India)  in the year before last, according to data from VCCedge, the financial research platform of VCCircle.  While many LPs began seeing returns (by the end of 2009) they still did not have substantial capital for new relationships. The economic slowdown also brought home lessons on the risk of illiquidity, which raised the bar for new commitments. Besides, the fundraising process is taking much longer on account of stringent due diligence by LPs (investors), who are increasingly seeking greater say and commitments from GPs (general partners). According to Kevin Johnson, MD, Liberty Partners, a placement agent specializing in emerging markets, “Most LPs that are active in emerging markets generally view India as an important PE market and expect India to continue to be an important PE market for the long term. At the same time, the share of the LP universe open to emerging markets is increasing, so the overall news is positive. That being said, recently many LPs have gotten the impression that they should notch downward their exposure to India PE because they feel the market is crowded and valuations are high.”

Power Leads the Deal-making Pack:  More than 20% of the total private equity deal-making till November 2010 was in the electrical utility or power plants including renewable energy assets. Out of the total $8.2 billion invested till November, $1.67 billion was in the power sector, according to data from VCCedge. What is driving deals is the huge demand-supply gap and the multiple formats of investible opportunities that exist in this space. The recent largest PE deal in almost two years–the $425-million PE infusion in energy firm Asian Genco Pte Ltd —is a testimony to the growing investor appetite in energy. Asian Genco is developing a power portfolio of hydro, thermal and non-conventional assets and has an aggregate capacity of nearly 4000 MW under construction. 

Consolidation in Realty PE:  There have been 37 private equity deals with disclosed value of $1,182 million in real estate in 2010 compared to 24 deals worth $606 million last year, according to VCCedge data. Realtors are increasingly relying on alternative channels such as PE firms and non-banking financial companies (NBFCs) to tide over the liquidity shortage.  The domestic realty PE industry saw major consolidation in 2010. Saffron Asset Advisors got acquired by IL&FS investment managers and Religare Enterprises is reportedly close to buying 85% of the Ajay Piramal Group promoted real estate fund Indiareit Fund Advisors.

2010, a year of record PE exits: 2010 clearly proved to be a record year for exits. According to VCCedge data, there were about 153 exits worth more than $5.9 billion in 2010 till November 2010. A few of the big exits this year were ChrysCapital’s stake sales in Infosys and Mahindra & Mahindra Financial Services, Sequoia’s stake sales in Mannapuram and SKS Microfinance and ICICI Venture’s in VA Tech Wabag and RFCL. The volume is likely to go up with two big PE-backed companies awaiting M&A sell offs, Paras Pharma and Patni. Incidentally, Paras Pharma deal got announced only this morning with PE majors Actis and Sequoia (who control 70% stake in the firm) raking in over $500 million in a $726-million strategic sale to Reckitt Benckiser.

Most of the exits in 2010 were, however, on the public markets side.  While industry veterans are seeing this as a positive sign, this is not such a great number in comparison to the dollars pumped into the Indian private equity markets till now. “It is good for relative exits,” said Raja Kumar, MD, Ascent India Capital Advisors.  Kumar argues that if even $20 billion would have been invested in India in private equity, going by a conservative estimate of even 1.5 times, there should have been exits worth $30 billion till now. But, there is no even visibility there, he adds.

Niche funds gain traction:  A host of niche and specialised funds, especially catering to the bottom of the pyramid market, came to the forefront in 2010.  Sustainable Enterprises Fund – an initiative sponsored by Ennovent, a for-profit enterprise – is looking to promote entrepreneurs who advance disruptive innovations for sustainability at the base of the economic pyramid. Soros Economic Development fund and Omidyar Network, founded by the Ebay founder Pierre Omidyar, are betting big on chasing sustainable innovations at the bottom of pyramid. Leapfrog Investments, a microinsurance fund  is looking at allocating close to $40 million from its $110-million global fund in India.  “Social investing is definitely witnessing a growing trend. Corporatisation of social projects is giving a new lease to this space,” Raj Kundra, Director of Capital Markets and Energy Portfolio, Acumen Fund, an active player in the BOP segment, told VCCircle in an interview.

Syndicated, Specialised & Mezannine deals on the rise:  As PE fund managers became more cognizant of return on capital on their investments, specialised deals came to the fore. “Specialised deals–discount to IPOs, IRR protection deals or escrows inbuilt to the deals–were seen this year,” said Kumar of Ascent India Capital.  Apart from such specialised deals where preferred returns were negotiated, a lot of syndicated deals were also seen. Also, PE deals are getting mezzanine in nature with a mix of debt and equity especially in infrastructure and real estate.

Early stage investments also show exits:  India increasingly has proven to be a market for growth investing than venture investing but a few of the early stage investments showed some exits this year.  Billionaire venture capitalist and co-founder of Sun Microsystems Vinod Kholsa, one of the early investors in SKS Microfinance, gained $117 million from the company’s recent listing. Some other investments that delivered good returns to investors include InMobi (Mumbai Angels), Mango Technologies (Ojas Venture Partners), Metahelix (Nadathur Holdings), Carwale (Seedfund) and others. “2010 was a seminal year for the VC industry because this was the first year where true meaningful exits were delivered by the market”, Ash Lilani, MD, Silicon Valley Bank, told VCCircle in a recent interview.


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Rise of Star GPs, Record Exits & Niche Funds Mark PE Scape In 2010

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