Private equity cos struggle to raise funds, exit firms

Private equity funds are caught in a fix as both raising funds and exits become tough, along with some regulations posing hurdles to investment. Limited partners (LPs), who invest in PE funds, are now more cautious to invest money in India-focused PE funds as the internal rate of return or IRR does not match their expectations.

?Fund-raising has become a tough business now,? says Subbu Subramaniam, founding partner at PE fund MCap Fund Advisors, who started work to raise $250 million. There are roughly 120 PE funds seeking to raise around $34 billion in calendar year 2011. Finding right deals has also become difficult. Three LPs FE spoke to said that India is now realising the importance of sourcing the right deals.

?The Indian private equity industry is only realising it now that domain knowledge and adding value to the investment is far more important than just providing funds to the promoters,? says Varun Sood, managing partner at Switzerland-based Capvent AG, a private equity fund that also co-invests with both global and emerging Asia focused funds. ?Private equity funds are paid to go out, source the right deal and add value to it.? Capvent has committed to invest in 15 Indian PE funds. Some LPs say PEs lack understanding to run the business they invest in.

?Today?s Indian GPs (general partners) lack the style and understanding of investing in firms,? says Anubha Shrivastava, managing director at fund of funds CDC Group. She strongly feels that ?Just banking on a good idea is not enough; we need GPs who can help that idea grow.?

Some LPs are waiting for the right GPs who manage PE funds. ?We haven?t invested in the last one and a half years as we were waiting for more experienced PE professionals to start fund-raising,? says Soichi Sam Takata, deputy head of private equity at Tokio Marine Asset Management, a Japanese LP to Indian private funds. The Japanese asset management company backed two GPs and three funds in India in 2006 with $30 million or R148 crore, 3% of its $800 million global corpus. The firm invested 5-6% from its total fund in China. There is also a mismatch in IRR between GPs and LPs. ?There is a fear among the limited partners whether the PE firms will be able to give the desired 15-16% IRR,? says Vikram Utamsingh, executive director and private equity head at consulting firm KPMG India.

The changes in foreign direct investment (FDI) policy also act as a deterrent. The government said in its recent policy that FDI investments in the country cannot come with a put or call option. The Department of Industrial Policy and Promotion, a body that contributes to foreign investment policy, said if any equity instrument like compulsorily and mandatory convertible debentures or fully compulsorily and mandatory convertible preference shares is attached with any option, then that will not be considered FDI, but an external commercial borrowing (ECB).

?These FDI regulations will have to change,? says PR Srinivasan, managing partner at private equity firm Exponentia Capital. His fund is in works to raise $400 million. ?It is too early to comment on the new FDI guidelines but it will certainly impact PE investments,? Utamsingh of KPMG India said. But Dalip Pathak, managing director at Warburg Pincus Llc said: ?PEs are happy to take commercial risks but not comfortable in taking regulatory or exit risks.? Even though he is hugely optimistic about investments in the long run, he knows that policy uncertainty is making investors nervous.

The volatile stock market and concerns of a slowdown are delaying exits this year compared to last year. On Wednesday, the benchmark Sensex of the Bombay Stock Exchange rose 421.92 points or 2.55% to close at 16,598.39 points.

Private equity funds have exited 94 companies by raking in $2,172.38 million in 2011 until now as compared to 174 exits worth $4,533.09 million in 2010, based on data provided by VCCedge, a firm that facilitates data on M&A, private equity and venture capital investments in India.

Delay in companies? share sales through initial public offers (IPOs) is also playing spoilsport.

?IPOs are no longer an avenue available for exits,? says Utamsingh of KPMG. ?IPOs typically gave 30% opportunities for exit for investors in companies.? Many LPs at the Private Equity International India Forum on October 4, 2011 in Mumbai felt that China was a better market for exits through IPO as compared to India. ?In bad times, LPs are more cautious,? says Ajit Kumar, managing director at private equity firm Evolvence India Fund. Evolvence is currently raising a fund worth $400 million.