Choppy markets force private equity funds to seek extension for capital use

Written by Shruti Ambavat | Mumbai | Updated: Aug 29 2013, 13:54pm hrs
Private equity firms such as TPG Capital have asked their limited partners (LPs) for more time to invest undeployed capital, citing the current economic situation and a risky market.

Typically, the time-frame for a PE fund to make investments is five years and that to return the money to investors is 9-12 years. But, sometimes, they may ask for a year's extension. It is logical to go slow on investment as the market is risky, said a fund manager from a large PE firm who did not wish to be quoted.

Sun-Apollo India Real Estate Fund had asked for a one-year extension on its fund cycle ending February 2011 to February 2012. TPG Capital asked its global investors to extend the period for investment by a year for its $19-billion buyout fund.

Experts cite lack of exits as one of the reasons for the extension. Some funds may want an extension on the investment time period due to economic uncertainties. PE firms have also not made exits from previous funds' investments and, hence, would want an extension on the life of the fund which would give them more time to exit, says Sandeep Naik, managing director at General Atlantic. In India, people are waiting for the rupee to appreciate, which will give better returns in dollar terms, Naik said.

Apart from the depreciating rupee, the lack of fresh opportunities is also cited as a major reason for PE firms' asking for an extension. Many PE firms in India may ask for an extension given the market situation and economic volatility, said a consultant on the condition of anonymity.

Generally, fund managers ask for a year's extension, but anything beyond that is not seen favourably. Usually, over two-thirds of investors need to vote in favour of an extension to get the resolution pass-through for PE firms, says Prakash Kalothia, managing director and CEO at Sun-Apollo India Real Estate Fund. Fund managers would prefer an extension of 1-2 years as that will give them a good waiting time to invest, says Naik of General Atlantic.

"It is not unusual for PE fund managers to ask for an extended time-line on investments when the environment is tough. Also, LPs look at such a move positively. However, sometimes it has been misused by the PE firms," says Kalothia of Sun-Apollo India.

Though it's not a new practice abroad, fund managers are unsure whether an India-focused fund can get an extension approval easily. LPs will give an extension to a GP in which they have confidence, but generally these extensions are not beyond six months. In India, LPs have not been happy with the returns and many may not be ready to extend the investment period. The track record here will certainly matter much more, says JM Trivedi, partner, head, Actis South Asia.

LPs have not been happy with their returns from India. Given the situation, if some funds ask for an extension, it may not happen, the consultant quoted before said. Whether the LP will allow fund managers an extension depends on the track record of returns, says Naik of General Atlantic.

It is generally not easy to get the vote in favour of an extension because one needs to meet the LPs and explain them the rationale behind such a move, says Kalothia of Sun-Apollo India. "Today, if you are an India-focused fund asking for an extension on investment time period, you will have a hard time getting the permission since LPs are not happy with the returns from this region," Kalothia said.

"Fund managers in India with no global track record, or first-time managers, would find it tough to ask for an extension since they have neither global footprint nor a history of positive returns, he said.

"The trouble is that a lot of PE money is chasing very few deals and the money invested in the peak time of 2004-05 got erased. Consequently, new investments have been difficult to come by, says Parag Dhol, managing director at Inventus (India) Advisors.