There are two words you almost never want to bring up with anybody in the private equity (PE) business: limited partner (LP). It is probably the single-most effective way to cut short a perfectly normal conversation on the health of the business. So, imagine my surprise and delight when I found myself exchanging business cards and more than small talk with an astonishing five LPs at a PE conference in the city last week. “We have an office here, you should come over some time,” said one. If LPs are willing to come out of the closet, it is a sure sign that India’s PE business has arrived at an important juncture.
In the mega-dollars, high-stakes global PE industry, LPs are sort of blue blood. They fork out millions of billions of dollars to PE firms that then put that money in companies. In fact, the term PE originates not just in the nature of investments, but also in the closely guarded sources of funds for such investments. In industry lingo, the PE firm is known as the general partner and its job is to manage the fund in return for an annual fee, which is calculated as a percentage of the money invested in and managed by the fund as well as a share of profits, often called the carried interest. The investors are known as LPs and are known as so because their role is limited to only a right to a share of the profits.
In the US, which is home to the world’s largest PE industry and market, the big LPs are public and private pension trusts, university endowments, corporate foundations and financial institutions, usually banks. Many of them, such as public pension trusts and public university endowments, are open to public scrutiny. These institutions, along with banks and other private trusts, make up more than 40% of funds raised by US PE firms each year. Then there are fund-of-funds, such as the ones run by Lehman Brothers in the US or AXA Private Equity in the UK, which operate as LPs in addition to being direct PE investors. But the most interesting is the well-heeled individual investor. Information on such investors is almost never available. So, for instance, New York-based General Atlantic’s fundraising sources will always remain a closed book because it raises nearly 90% of its funds from wealthy individuals. Just how wealthy are we talking? Mumbai-based IL&FS Investment Managers Ltd, which is half-way through raising a $400 million fund (Rs1,640 crore), has just raised $15 million from one such wealthy gentleman in Abu Dhabi.
Now for the India connection. Even today, more than 60% of the PE money that comes to India is from the US. Until a year ago, despite India being one of the hottest investment destinations for global PE firms for over three years, even publicly known LPs would rarely admit to having sunk money into this market. It was simply considered too risky. At the conference last week, LPs were not only ready to mingle, but a couple of them also spoke on various panels. The message was loud and clear—all is fine with India.
Snigdha Sengupta is Mint’s resident expert on private equity and venture capital. Comments and questions are welcome at email@example.com