Bangalore/Mumbai: In May 2009, when Sandeep Aneja and three others decided to raise India’s first education-focused private equity (PE) fund, they were clear about one thing—they wouldn’t seek capital from global investors.
That went against the practice till then. Foreign limited partners (LPs) had been significant backers of venture capital (VC) and PE funds in the country. But as the liquidity crunch set in globally, these investors turned cautious about new commitments to Indian funds, particularly maiden ones.
In India, local investors were looking for new opportunities. After a bull run of nearly two years, the stock markets had turned volatile. PE firms—a relatively new but highly profitable asset class—seemed a better option.
“It’s easier to raise funds here. The rest of the world is suffering from cold,” said Aneja, co-founder, Kaizen Management Advisors Pvt. Ltd. “Most foreign LPs are not sure about their allocation for private equity and it will take some time before they have clarity on this.”
Kaizen, based in Mumbai, is raising a Rs350 crore fund and expects to have its first closing in the next two months.
Aneja’s gamble has become more the trend in the recent past. Firms that started raising funds in the past eight months have got more backing from domestic investors. In the past, PE firms have traditionally preferred a combination of global and local investors to diversify capital availability risks.
Three fund managers other than Aneja told Mint they found it easier raising capital from local investors for their maiden funds.
For one, Indian LPs are more open than global investors to small and sector-specific funds. Bangalore-based Stega Capital, for example, found support from Indian LPs but overseas investors have not paid much attention to it.
“The fund size matters,” said fund manager Srini Vudayagiri, who has about 15 years in the VC business. “Ours is a $50 million (Rs229 crore) fund. I do not think there is a large desire for backing such funds. The small size makes it difficult for them to monitor such allocations,” he said.
Indian LPs are also more attractive financially. Foreign investors, in general, expect 25-30% internal rate of return while Indian LPs agree to compromise by a percentage point or two.
Domestic LPs do not ask to factor in for country risk either, gauged on the basis of the socio-economic and political condition of a nation.
Local investors are about convenience as well. A PE firm approaching a foreign LP for a new fund would typically spend considerable time selling the concept of India and its growth story.
“Instead, (with local LPs) one can focus on explaining on how their PE fund is a good investment,” said Harsha Raghavan, managing director, Steer Capital, a newly launched fund in Mumbai. But if a fund manager is raising a corpus of more than $200 million, he would have to look at offshore investors as most Indian LPs don’t have a base that deep, said Raghavan, a former India head of UK-based PE firm Candover Investments Plc. Steer Capital is yet to decide its corpus.
Indian investors are enthusiastic about backing Indian PE firms, even if the stock markets have rebounded since March.
“I am a very conservative investor. So, instead of going to a sector-wise mutual fund or investing in a specific stock, this works out better,” said J.K. Shah, a retail investor in Mumbai who has put his money in funds such as Aditya Birla Private Equity. “Here, I can commit Rs50 lakh, pay Rs20 lakh up front, and from the fourth year, I start getting returns. I can make almost a 25% return.”
Foreign investors say the entry of domestic LPs is not without hitches. The varying risk and return expectations of local investors could lead to a situation where all the LPs are not aligned in a fund.
“They (local LPs) could make initial mistakes as they learn the nuances of investing in the PE space, thereby supporting poor quality teams,” said Praneet Singh, managing director, Siguler Guff India Advisers Pvt. Ltd, the local arm of the New York-headquartered PE firm. “This would increase competition in the market, leading to pricing pressure for the good funds,” he added.
Foreign investors also say some domestic LPs may not be familiar with international best practices.
“Domestic LPs in India tend to be less sophisticated than foreign LPs and can be highly driven by relationship reasons,” Low Han Seng, executive director (investment management), at Singapore-based United Overseas Bank Ltd, said by email. “They also tend to want to get involved in the investment committee, which foreign LPs do not want as it may jeopardise their LP status.”