PE players stare at prospect of unused funds

A slew of private equity (PE) players who had raised India-focussed and dedicated funds in 2006-07 are now facing a problem because a majority of them are sitting on unallocated capital with their fund cycle nearing an end.

They will now either have to return unused capital to their limited partners (investors in the fund) or go in for aggressive investments at unviable valuations to utilise the existing fund capital, even if it means settling for not the best of deals.

In fact, Chrys Capital, which is managing a fund size of $1 billion, has asked its primary funds for shortening the fund size. FE spoke to a host of PE funds and LPs who are mulling taking similar position on this aspect. For the record, in 2006-2008, a whopping $15.990 billion was raised by India-dedicated funds and $33.877 billion by India-focused funds.

Anil Ahuja, head of 3i Asia Pacific, confirmed: ?Even as entry valuations are coming steep, fund mangers are deploying unallocated capital as the fund cycle is nearing its expiry period.” Ahuja aaid this unallocated capital is turning out to be a big challenge for the industry.

It’s a further dampener for an industry grappling with difficult exits and low internal rate of returns. The fund cycle syndrome is any way pinching general partners (GPs) who also have to show exits in their portfolio. Vikram Utamsingh, head of private equity at KPMG, said: ?A PE firm has to give money back to its LPs in the stipulated time to demonstrate successful fund management. GPs will have to show meaningful exits, even if it means exiting at not the best of returns.”

JM Trivedi, head, Actis South Asia, confirmed that this trend of investing at high valuations and exiting at lower returns is squeezing margins of funds on both ends, ?a double-edged sword for GPs”.

Industry observers point out that the case of returning capital to LPs, or LP reducing commitments has been between far and few in the PE space. In mid 2010, one of the largest PE funds in India, ChrysCapital had returned about $300 million from its $1.15-billion ChrysCapital Fund V to its LPs.

Even after two years of fund-raising, the firm was Reportedly sitting on more than 50% of unallocated capital. In 2009, TPG had offered investors in its Asia fund the option to cut their commitments by up to 10% relatively early in the fund?s life; TPG Asia V raised $4.25 billion in 2008. Even as flexibility in investment strategy and type of capital deployment are cited as official reasons for returning capital, as per industry insiders, shrinking investable space is a strong probability.

Anubha Srivastava, managing director, CDC group, a fund-of-funds investor, pointed out: ?Given the dynamics, it’s imperative that PE firms take a bold decision and return capital to LPs rather than making less rational deal decisions. Retuning capital will further enhance the teams’ next fund-raising endeavours and boost its image”. However a GP reasoned that returning capital was not the easiest decision to take for a firm: ?easier said than done”.