Investors in PE funds or limited partners (LPs) want more control in deciding deals.
According to the latest report by Grant Thornton titled 'Global Private Equity Report 2013/14', over 35% of the PE fund managers surveyed for the report will use co-investment opportunities as an attraction to lure LPs.
“Some of the LPs are setting up offices in India. They want direct access to investee companies and more exposure,” says Pramod Ahuja, partner at Tata Capital Growth fund.
“There is potential to make more money through direct investments,” he adds.
“Co-investments are used to avoid the average management fee of PE funds and to reduce the amount of carried interest as the money will directly come from the pocket of the LP,” said a fund manager from a global PE firm.
A leading global pension fund Teachers' Private Capital decided to increase its exposure to India through direct investments. UK-based development finance institution CDC Group also opened up an office in India and is planning to invest at least $1 billion over the next four to five years out of which half would be through direct investments.
CDC has also appointed an Asia funds team head, Alagappan Murugappan, who has a private equity experience with UTI Capital.
“Those who have a PE wing within their structure usually opt for direct investments,” said Sanjiv Kaul, managing director at PE firm ChrysCapital.
Pension funds, endowment funds or sovereign funds have the appetite to invest large amounts in companies directly instead of taking the LP-GP route.
“Co-investments will only increase in India now and large LPs like pension funds will ask for it more often,” said Satish Mandhana, managing partner & chief investment officer, IDFC Alternatives.
“Funds like sovereign, pension, etc have pockets for private investment,” said Kaul.
“LPs have been asking for direct stake in the investee companies. If it is a large deal then GPs which are usually growth capital prefer LP as co-investment as that increases the stake together,” said Sanjeev Krishnan, executive director, private equity at consulting firm PricewaterhouseCoopers India.
Most of the single private equity investments in India are under $100 million.
Blackstone group invested $100 million in Sree Jayajothi Cements early this year.
Another PE fund Goldman Sachs invested $110 million in DEN Networks and $135 million in ReNew Wind Power. Sovereign funds on the other hand have done much larger ticket-size deals.
Qatar Foundation Endowment invested $1,260 million in Bharti Airtel early this year. The Government of Singapore Investment Corporation invested $239 million in Kotak Mahindra Bank.
“Their (PE) individual ticket size is small and they rely on co-investors for the rest of the money to come in,” said a fund manager from a PE firm.
PE funds with corpus less than $500-600 million will prefer co-investments with their investors.
Sectors, which usually attract direct investments, are the evergreen ones like consumption and financial services. These sectors are also a favourite with private equity funds.