Mumbai: Investment firm WestBridge Capital has raised India’s first so-called evergreen fund from global investors, or limited partners (LPs).
Unlike traditional funds, the $500 million (around Rs 2,500 crore) corpus that WestBridge has raised will not have an investment cycle. Instead, returns generated on investments will automatically be ploughed back into the investment pool, creating a perpetual flow of capital for investments. In other words, this evergreen fund will do away with the need of raising subsequent funds for investments.
Typically, private equity (PE) funds have a life cycle of 10 years.
It’s a vehicle that is long term, said Sumir Chadha, founder and managing director, WestBridge, in his first media interaction after the team’s split from Sequoia Capital in February. Along with three others—K.P. Balaraj, S.K. Jain and Sandeep Singhal—Chadha left Sequoia to start a fund of their own.
When investors find a good company, they don’t want to sell their stake in it, but many of them end up selling because the fund life is coming to an end, according to Chadha. “The evergreen fund structure allows us to take a very long-term view on companies in a way that can’t be done with regular funds.”
Besides limited partnerships, other PE investment vehicles in India include direct investments by rich individuals. Yet another structure is captive funds that invest only for the interest of their owner organization, which could be a corporate house or a financial firm. Such funds don’t have investors from outside. There are also semi-captive funds that bring together capital from both outside investors as well as the owner company.
“There is too much private equity money in India. Valuations are too high. In any market, returns fall when there is too much competition. We thought why raise another fund when there is already too much of such capital available in the market?” said Balaraj, co-founder and managing director, WestBridge.
WestBridge’s debut $500 million fund will have a life cycle of 20 years and could be extended by at least another 10 years or even more. There is a lock-in period for investors and the LPs will not be allowed to withdraw investments for a stipulated period. The WestBridge executives, however, declined to say how long the lock-in period is.
In a traditional fund, the lock-in period is one-three years.
While longer lock-in periods in evergreen funds are a hindrance, the attraction for LPs lies in higher returns. “On a risk-adjusted basis, LPs get good to better returns with such structures,” said Chadha. Net annual returns of 17-18% would be considered good in late and listed stage, he said.
The investors in the fund include university endowments and foundations, Chadha said. No single investor holds more than a 12-13% stake in the fund.
The fund was raised in three months and closed in August, but WestBridge did not make any public announcement on its unique structure. It has already made four investments in listed entities.
“We want to keep our investments under wraps as the companies we invest in are low profile and not actively traded. Other investors can copy our model and drive up the prices,” Singhal said. Ideally, WestBridge likes to be the second largest investor in any company after the promoters, he added.
Its typical equity investment ranges from $10 million to $50 million.
The open-ended structure of the fund gives WestBridge the liberty of investing in companies at various stages and it does not plan to list it.
Experts say it’s the early-stage firms that need a continuous flow of capital more than late-stage or listed entities. “You don’t need an evergreen fund for public market investments. In such companies, an investor can liquidate rather faster,” said a senior executive at an advisory firm, who did not want to be named.
Vivek Gupta, partner, BMR Advisors, said that while traditional LPs are the first step in an evolving PE industry, the emergence of evergreen funds indicates maturity and strength of a market. “The proportion of evergreen funds compared with traditional funds is still small as these funds are more evolved, looking at later stages,” Gupta said. “The thesis is yet to be tested in India.”
Even in a mature market like the US, evergreen funds raised from LPs constitute a small part of total PE market.