A better investment landscape seems to have ushered in a season of fund raising by private equity (PE) and venture capital (VC) firms, which are looking to partner with entrepreneurs seeking capital for business expansion. However, while Narendra Modi’s pro-reform government has encouraged foreign limited partners to selectively increase investment exposure towards India-focused PE and VC funds, domestic limited partners prefer to allocate capital towards other investment platforms.
“Funds raised during the 2006-2007 cycle have not generated much returns. We choose opportunities on a case-by-case basis,” says Pravin Kutumbe, chief investment officer at Life Insurance Council of India (LIC).
With a corpus of over Rs 18 lakh crore, LIC is one of the domestic investors in category I and II alternative investment funds (AIFs). The insurance behemoth typically invests up to 10% of the AIF’s size, or 20% of overall exposure, whichever is lower.
In FY 14 LIC had allocated around 0.13% of its fund to category I and II AIFs, while the overall exposure limit to AIFs has been capped at 3%. Insurance companies have mainly preferred safer investment options like government paper.
Among institutional investors like banks, SBI has been the most active domestic investor in VC funds. Yet, in FY14, SBI had allocated Rs 1,172.9 crore or 0.07% of its total investment and advances towards venture capital funds.
PK Gupta, chief financial officer at SBI, says the country’s largest public sector bank has very little exposure towards commitments as a limited partner in VC funds.
“Once in a while we participate in VC funds, but generally in the past returns have not been very encouraging,” Gupta added.
Although private equity investment increased from $1.5 billion in 2004 to $4.6 billion in 2009, gross returns to investors decreased from 45% to 2% during the same period.
As per data compiled by Venture Intelligence, general partners raised $851 million from the domestic market and $4.42 billion from the foreign market in 2007. In an overall challenging macroeconomic environment, there was a general decline in fund raising, but even traditionally fund raising has been skewed, with nearly 80% of the capital pouring in from foreign shores versus the domestic market.
“As far as general partners’ fund raising is concerned, the domestic market is very small and shallow. There isn’t a significant pool of money, since domestic limited partners choose to deploy capital towards other investment platforms,” said a partner of a law firm involved in advising PE and VC funds on fund raising and deal structuring.
PE and VC firms are called general partners (GPs), and its investors are called limited partners (LPs).
Domestic limited partners include family offices, high net worth individuals (HNIs) and financial institutions like insurance companies and PSU banks.
“Most domestic limited partners have their own business priorities. Besides, most family offices choose to invest in companies directly via their internal team rather than depending on third-party general partners,” the law partner mentioned earlier added.
A common refrain from general partners is that the capital contribution from institutional limited partners is not in line with the effort put in towards fund raising in the domestic market.
“The domestic fund raising market is pretty weak for private equity in India. There is no organised LP system. In the retail market there is still some demand for real estate and mezzanine products,” noted Gopal Jain, managing partner, Gaja Capital.
Amit Bhagat, managing director and chief executive of ASK Property Investment Advisors, said although there is a lack of institutional capital in India, ultra-HNIs have been active domestic investors.
“Domestic limited partners have been active since 2009. We have raised approximately R3,000 crore mostly from ultra HNIs and family offices in the domestic market in the past six years,” Bhagat said.
For example, Gaja Capital fund 1 raised around Rs 120 crore from the domestic market, largely comprising individual investors. Similarly, Orios Venture Partners’ fund 1 raised Rs 300 crore from domestic sources, of which around R210 crore was non-institutional capital.
“The overall outlook for domestic fund raising now looks positive and we will see participation of more domestic limited partners,” Arvind Mathur, president of Indian Private Equity and Venture Capital Association (IVCA), said.
Hemant Contractor, chairman of Pension Fund Regulatory and Development Authority (PFRDA), expects investment guidelines for National Pension System (NPS) to allow the fund to invest in asset classes like PE and VC over the next three years.
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