Institutions and wealthy individuals who invest in private equity (PE) funds, known as limited partners (LPs), are stepping into a more active role to monitor the investments flow even as concerns that the Indian PE market might be overheating are growing.
US and UK-based LPs, who have started allocating fresh funds for investment in India, want to be closer to the ground to ensure that the money is invested in the right opportunities and at the right valuations. Several LPs have discreetly set up base in Mumbai and New Delhi in recent months to directly monitor the activities of their investee funds.
Most LPs investing in India keep a low profile even though some are publicly known as long-time India investors. Chief among these are Harvard Business School (HBS), Stanford University and HabourVest Partners from the US and Pantheon Ventures, Coller Capital and Capvent from the UK and Europe.
HBS, according to industry estimates, has invested more than $1 billion in India. Its portfolio of investee funds includes Delhi-based ChrysCapital India Advisors that raised a $550 million (Rs2,420 crore) fund in 2005.
Estimates put the quantum of US and UK LP money in the pipeline for India over the next 12 months at $6 billion. This is in addition to the estimated $10 billion that has already been allocated, largely by European and West Asian LPs in 2006.
This is the second tranche of fund allocations by US and UK investors. The first tranche was released in 2005 when large-cap firms such as ChrysCapital, Actis Capital and Henderson Global Investors raised new funds for India.
“At that time, fund-raising in the US private equity market was just gaining momentum after a two-year slowdown and emerging markets such as India and China were lower on priority,” said a San Francisco-based LP who did not want to be named and was in Mumbai this week to attend the two-day PE seminar organized by Australian business media firm Terrapinn.
As the second tranche of funds from such LPs begins to flow in, PE fund managers will have to get used to their LPs participating in deal due diligence.
“We won’t actually meet the companies that are potential investees, but will certainly keep close tabs on the pre-investment process and do our own due diligence on the sector,” said a representative of another LP, which has its headquarters in London.
Varun Sood, managing partner, Capvent AG, a Switzerland-based LP that has offices in Delhi, admitted that the fly-in-fly-out mode of operation does not work in India even for LPs.
“The Indian PE market is very different and PE investments make up nearly 70% of the country’s foreign direct investment inflows. This is not the case in mature markets such as the US. It is a whole new ball game for LPs,” he said while addressing the conference.
About 90% of PE investments in India are in growth firms and the size of deals are in the range of $20-50 million.
In the US, growth deals typically occur in unlisted firms.
However, taking a firm public in Indian markets is relatively easy and most growth investments by PE firms actually take place in listed companies. PIPEs (private investment in public entities) make up more than 60% of the deals done.
Therefore, often a listed company’s business and operations resemble that of an early stage company.
So, PE investors who would otherwise be arm’s length partners in listed companies in the US or the UK, where PIPEs account for under 30% of deals, want to behave like venture capital investors in listed companies in India.
“It is important to understand this difference and, therefore, the associated risks attached before committing money to funds that are investing here,” said the representative of the London-headquartered LP who did not wish to be identified.
That LPs have turned cautious about releasing fresh funds to India is evident from the fact that fund-raising in 2007 has slowed down significantly.
In 2006, PE firms raised $2.2 billion in new funds. This year, $203.1 million has been raised so far. While the pipeline looks robust, the actual money available for deployment will depend on how quickly LPs gain confidence with respect to the Indian market.