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  1. As limited partners go cautious, capital turns scarce for India-dedicated PE funds

As limited partners go cautious, capital turns scarce for India-dedicated PE funds

Even as private equity (PE) funds seek to raise capital to increase their investment exposure to India, their limited partners...

By: | Mumbai | Published: March 7, 2015 12:14 AM

Even as private equity (PE) funds seek to raise capital to increase their investment exposure to India, their limited partners (LPs) are being cautious and selective since their recent returns haven’t been too encouraging. According to Vikram Hosangady, head of transaction and restructuring, KPMG India, “India-dedicated funds will be back on the radar but LPs will be selective and keen to back only high performing investment managers with a differentiated investment policy.”

According to data reviewed by FE, India-dedicated funds (funds to be invested only in India) raised $12 billion in 2007, which declined to nearly $4 billion in 2014 (see chart). While it is difficult to estimate the exact capital to be raised by India-dedicated funds in 2015, the industry expects it to increase by 20-25% from last year. Rakesh Sony, director at Motilal Oswal Private Equity, says the Modi-led government has helped India build a strong investment case. “Fund-raising is definitely better than last year. More and more PE firms are planning to raise funds,” he says.

But all PE funds may not be able to meet their targets. Sanjeev Krishan, leader, PE practice at PricewaterhouseCoopers India, says there are hardly any first-time funds that have been able to raise money and also return capital to investors. “There are many funds in the market, but now limited partners (LPs) pay a lot more attention to the track record of the PE firm”, Krishan says.

Capital

Over the past seven years, PE funds invested approximately $76 billion in India. This comprises $42 billion by foreign funds, over $21 billion by India-dedicated funds, and around $12 billion worth co-investments. But dismal exit performance, coupled with the fact that PE fund managers have found it difficult to realise these investments and return capital to LPs, has adversely affected PE companies’ ability to raise capital for new investments.

“Investors have always been convinced that there are opportunities in India, but they are not sure if the opportunities are real,” Vishakha Mulye, MD and CEO, ICICI Venture, said. “So we are very focused on exits. In the last four-five years, we have returned close to $1 billion to investors.”

However, since India is relatively more attractive than other emerging economies, a lot of money already raised by global PE funds may flow to India. Rakesh Sony says there is an increase in investment allocation to India.

“Now most large global funds are in India and do not need to raise India-specific funds to invest in India,” he adds. Mayank Rastogi, head of PE at EY India, says foreign capital inflow by non-domestic PE firms comprises 80-90% of the PE capital in India. “There is dry powder (funds available for investment) of $15-20 billion available to India in 2015.”

A structural slowdown in China, and geo-political instability in Russia, have added comparative lustre to India as an investment destination. India’s benchmark index, the Sensex, has increased around 30% since May 2014. Listed Indian companies currently trade at a price to earning multiple of 20.65 times, which is higher than the multiples for listed companies in Brazil (15.94 times), Russia (8.93 times), and China (15.64 times).

Gopal Jain, managing partner at Gaja Capital, stated that India’s current performance was contra-cyclical to most other emerging markets.

“Countries such as Brazil and Russia are mostly commodity driven. Given the unravelling of the commodity cycle, India is faring better than many other emerging markets and represents better business opportunities,” he said.

* India-dedicated funds raised $12 billion in 2007, which declined to nearly $4 billion in 2014. The industry expects it to increase by 20-25% from last year
* Over the past seven years, PE funds invested approximately $76 billion in India. This comprises $42 billion by foreign funds, over $21 billion
by India-dedicated funds, and around $12 billion worth co-investments
* Dismal exit performance, coupled with the fact that PE fund managers have found it difficult to realise these investments and return capital to LPs, has adversely affected PE companies’ ability to raise capital
* A structural slowdown in China, and geo-political instability in Russia, have added comparative lustre to India as an investment destination. The Sensex has risen around 30% since May 2014

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