Mumbai: Private equity (PE) is expected to win a bigger share of investment portfolios over the next three-five years globally despite a worsening sovereign debt crisis in Europe and slowing global growth.
Furthermore, investors’ exposure to Asia-Pacific PE will continue to grow rapidly, as more North American, European and Asia-Pacific limited partners (LPs) will increase their allocation to the Asia-Pacific region in the next three years, according to Coller Capital’s latest Global Private Equity Barometer, released on Monday.
LPs, however, differ when it comes to viewing India. A larger number of North American investors favour India as an investment destination than Asia-Pacific investors.
For Asia-Pacific LPs, India is in the bottom three for buyout investments over the next two years. For venture and growth capital investments, India is the second most favoured destination after China. For global LPs, China, India and Indonesia are the most attractive destinations for venture or growth investments in the region. There is an interesting discrepancy between views of LPs in different regions about India, Hiro Mizuno, a partner at Coller Capital, said in a phone interview. It seems India’s neighbours are less optimistic about the country’s PE industry than those farther away, he said, adding that it is a reflection of what is happening in the local PE market.
“Indian PE has not performed as well as expected. It has also not performed as well as its neighbours like Japan and South Korea. People who are nearby seem to understand these factors better than people who are far off,” he said.
According to Mizuno, these could have a long-term impact on Indian fund managers including on their fund-raising plans. “GPs (general partners) need to show returns, rather than just relying on people’s positive impression of Indian growth—especially since growth itself is currently facing challenges. Global LPs have been very positive about Indian PE, but they won’t remain positive indefinitely.”
This year, rating agencies Standard and Poor’s (S&P) and Fitch Ratings Inc. have lowered India’s outlook on concerns ranging from increasing fiscal and current account deficit to a faltering economic reforms agenda, saying these could heighten risks to India’s medium- and long-term growth potential. The country’s economic growth has slowed to 6.5% during 2011-12 from 8.4% a year earlier.
Mizuno said the rating cuts could impact the impression of global investors, who rely on such data for making investment decisions. “People who have real exposure to India seem to have a much more concrete view on what is going on with India and their opinions are not impacted by credit ratings. The rating cuts would, however, impact global LPs who rely on macro data,” he said.
Meanwhile, according to the survey, which was based on a survey of 101 LPs by Coller Capital, a global investor in the secondary market for private equity, 39% of European and North American LPs expect to have more than one-tenth of their private equity commitments focused on the Asia-Pacific region within three years (compared with just 15% and 21% of investors in those two regions today).
Meanwhile, there has been a dramatic rise in direct investments into private companies by LPs in the past few years. In the Summer 2006 Barometer, only about one-third of fund investors also invested directly. This proportion has now grown to two-thirds.
The trend shows no sign of slowing with 42% of limited partners saying they will increase their direct investing over the next three years. “We don’t see many direct investments by LPs in India. It could be done by GPs who failed to raise capital and could ask LPs to help them for a deal or two,” said Mizuno.
The secondaries boom (when one PE fund buys another PE firm’s stake in a company) is expected to continue unabated. There is also a strong consensus about the likely returns from distressed-debt funds. Three-fifths of investors expect distressed debt to deliver annual net returns of 11-15% over the next three-five years, with 89% of LPs expecting returns of over 11% from distressed debt. Low Han Seng, executive director of investment management at United Overseas Bank Ltd, a Singapore-based bank that backs private equity firms, said we could see emergence of such funding vehicles in India. “Yes, assuming they understand the regulatory issues and have the necessary resources and infrastructure to be successful. Not many GPs will be able to do this well,” he said.