Fundraising by PE firms hits a hurdle

Written by Shruti Ambavat | Mumbai | Updated: Aug 29 2011, 09:18am hrs
Although several private equity (PE) firms are in the process of deploying the funds they raised in the pre-recession period of 2007, those raising fresh funds are finding it difficult to sell the India story to global investors, experts say.

The reasons, they believe, are rising inflation, delay in project approvals and the presence of too many PE players.

Wage levels in India are very high and limited partners (LPs) have found new interest in countries like Indonesia, Thailand and The Philippines, said Deepak Shahdadpuri, founder and managing director, BCP Advisors, which is readying to launch a $250 million (R1,125 crore) sector-agnostic fund, which is currently in its pre-marketing stage.

Indonesia is a larger market for global investors who have a focus on emerging markets and LPs have been disappointed with India and its overtly expensive transactions. Regulatory delays are another factor, he said. BCP is expecting to close in the first phase of funding (around $55-75 million or R248-338 crore) by the year-end.

One reason for high valuation in deals is the fact that too much money (PE/VCs) is chasing too little paper (deals). According to Bain & Co, as much as $20 billion (around R92,280 crore) of dry powder held by private equity funds is looking for investment opportunities in India.

PE funds have started scaling down their targets. Milestone Capital Advisors planned to raise a R500-crore realty fund last year but will now close it with over R400 crore by the month-end.

Reportedly, Azure Capital had targeted to raise R350 crore a year ago for its first fund but reduced the fund size to R100 crore. Fund raising from the market has become difficult. Today, LPs are allocating less money here and backing even lesser funds, said Dhanpal Jhaveri, partner and chief executive officer, Everstone Capital Advisors. There is a lot of clutter in the PE firms industry and only the top few will be able to raise money, said Suvir Sujan, co-founder, Nexus Venture Partners.

At a recent convention in Geneva, LPs said they found Brazil the hottest country for investment since it is a commodity-rich region. A year ago, India was among the top picks for the same set of LPs, but currently, global LPs find the country a difficult region for very good returns. They prefer liquid opportunities the public markets over illiquid investments as the investors see PE funds rarely outperforming the public market investments.

We see more opportunities in China and Brazil because unlike India, they have more unlisted firms where investments tend to be more profitable, said a senior executive from a Mumbai-based limited partner firm. The LPs find it challenging to scale up very small regional players to national level and having too many PE or VC firms only adds to the confusion.

Avinash Gupta, leader-financial advisory, Deloitte said, LPs are asking them (Indian PE firms) a different model from other existing firms here.

Large firms will not find it difficult to raise funds because of their huge global presence. But the fight for a comfortable existence in the second layer is intense. Global LPs are in no hurry to invest in India and the news of bomb blasts, inflation and corruption only adds to the bad news.

Experts like Sanjeev Krishnan, executive director, PwC India believe, Fund raising became difficult for India post recession and corruption has further aggravated the issue.

Investors have their purse strings tightened. Many investors who burnt their fingers in 2007-08 in India will stay away now and many PE investments are still pretty much in the red even today. Unless the private equity firms return money they wont be able to raise fresh funds. The recent news of US economic slowdown only adds to the worries for Indian PE players. Exits are likely to get impacted due to US economic slowdown but the real impact would be seen only by January next year, said a managing director of a leading Mumbai-based private equity firm.

But PE firms have also not lost hope entirely. Though its not the right time for exits and returns from Indian deals, LPs cannot ignore India. Its just that the timing is an issue at the moment, the MD of a PE firm said. Even though the immediate scenario looks grim, India has a definite long story. China will always be lucrative among growing market but investors will not put all their eggs in one basket. Sanjeev Krishnan continued.

Gupta of Deloitte feels, Even though countries like Vietnam and Indonesia are interesting for investment, they lack the size that India commands.