Mumbai: After the global economic slowdown, limited partners (LPs) of private equity (PE) firms are increasingly asking their fund managers in India to stick to guidelines laid down by the Institutional Limited Partners Association (Ilpa).
The 15-page guidelines—released in September—are a set of best-practice principles set out by Ilpa, a non-profit global association of LPs that has around 230 members that manage at least $1 trillion (Rs46.7 trillion) in PE funds. At least 100 members have endorsed the guidelines.
LPs are primary investors in a fund and are typically pension funds, endowments, foundations, family offices and insurers, while their fund managers are known as general partners (GPs).
While these principles were put to effect almost immediately in other markets, as the US and European markets were the most affected by the global crisis, LPs are now also asking Indian GPs to adhere to the norms, which address problem areas such as reporting, corporate governance, management fee, and a so-called key man clause.
Wen Tan, managing director, Hong Kong-based fund of funds Squadron Capital Advisors Ltd, said his firm has asked its Indian GPs to follow Ilpa guidelines, without disclosing the names of these funds.
“Given the whole dynamics of fund-raising, it will be advantageous for GPs to follow the guidelines,” he said, adding that application of the principles will only increase as LPs have begun to incorporate some of these in their contracts.
High-profile exit: Relan started CX Partners two years ago. Ilpa says the exit or firing of a key employee should lead to an automatic suspension of the investment period—till an affirmative vote by investors. Harikrishna Katragadda/Mint
“Whenever we have an agreement, there are various references to the Ilpa guidelines,” said Anubha Shrivastava, managing director, Asia, CDC Group, the UK government’s development finance institution, adding that other LPs are doing the same, globally as well as in India.
She pointed out that the CDC Group has also asked Multiples Alternate Asset Management, in which it has invested, to follow the rules. The PE firm was floated by Renuka Ramnath, the former managing director and chief executive officer of ICICI Venture Funds Management Co. Ltd.
The Ilpa guidelines were drafted keeping in mind that the typical LP agreement is often well over 100 pages long, making it hard to focus on the common interests of the LP with the GP. “What is new is that it (the Ilpa guidelines) provides specific nuances around key issues and refines some of the terms which are known but not followed,” said Shrivastava.
In the Indian context, some of the key concerns revolve around management fees, reporting, corporate governance and transparency.
The guidelines, for example, state that management fees should be reduced significantly upon the formation of a follow-on fund and at the end of the investment period. In other words, fees in such cases should only be for running the organization and nothing in excess of that. “So the guidelines only indicate a slight tweaking in the fee model and not changing it,” said Shrivastava.
In the key man guideline, which refers to the exit or firing of a key employee, Ilpa suggests that such cases should result in an automatic suspension of the investment period with an affirmative vote by investors required to reinstate it. “This particular clause is very pertinent in India given the many changes that have taken place in funds,” said Brian Lim, principal and a part of the Asia team at Pantheon Ventures, a fund of funds, adding that it is equally important to make sure appropriate people are identified in the key person clause, and that specific for-cause events are outlined.
Among the more high-profile exits of such key persons have been Ramnath, who left ICICI Venture in April 2009 to start her own fund, Citi Venture Capital International’s Ajay Relan, who started PE fund CX Partners in July 2008, and Rajesh Khanna who left Warburg Pincus in March to start his own PE fund.
Transparency and corporate governance are also relevant in the Indian context. “LPs are quite frustrated with the transparency standards. Quality of reporting is not very satisfactory, so this sets a standard which the GPs can now follow,” says Vikram Utamsingh, executive director and head of the PE group at KPMG India Pvt. Ltd.
The guidelines state that a fund should provide detailed quarterly reports on each portfolio company with information regarding key financial items such as revenue, debt, profit and loss, among others. It also recommends quarterly reports by the fund on matters such as schedule of expenses of the general partner, material changes in investments and expenses.
Indian GPs confirm that LPs are now asking for adherence to Ilpa norms.
“It’s back to basics when it comes to PE investing in India,” said Nainesh Jaisingh, managing director, Standard Chartered Private Equity Advisory (India) Pvt. Ltd, adding a number of LPs are insisting on more robust deal structures.