Mumbai: About two dozen private equity industry executives are on the road to raise up to $2 billion for their new funds, and anecdotal evidence suggests that they may be able to do so—an indication that limited partners (LPs) or those who invest in funds believe in the emerging India story.
That should be music to the ears of the funds and general partners (GPs, those who manage private equity funds) on the road. The list includes former Carlyle Group managing director Mahesh Parsuraman and former India Value Fund Advisor partner Sunil Vasudevan’s Amicus Capital; former KKR India director Heramb Hajarnavis’s Sea Link Capital Partners; and Siddharth Parekh’s Paragon Partners.
The $2 billion number doesn’t include the amount being raised by established private equity funds. The Renuka Ramnath-promoted Multiples Alternate Asset Management Pvt. Ltd, IDFC Alternatives, private equity veteran Ajay Relan’s CX Partners and growth capital funds Tano Capital and Motilal Oswal Private Equity are all out raising money.
The chances of first-time fund managers pulling it off depend on the way investors see India (and, more specifically, what the funds these managers are launching have to offer).
“India is definitely a shining star. On the fund-raising front, things are better than they were a couple of years back," said Nupur Garg, regional lead, South Asia at International Finance Corp. (IFC), part of the World Bank group, and one of the largest investors in private equity in the region.
“LPs today, are very open to an India conversation. They are willing to take different bets now and even first-time (fund) managers are today seeing some sort of traction, which was absolutely unheard of (even) a few years back."
Fund managers on the road echo Garg’s sentiments.
“We are definitely seeing interest coming back into India with the macroeconomic situation being one of the strongest reasons. There is a lot going for India now, given the 7-8% growth, the (current) government and the policies being implemented," said Siddharth Parekh, founder and senior partner at private equity fund Paragon Partners. Parekh, the younger son of HDFC chairman Deepak Parekh, was earlier a principal at UK-based private equity firm Actis’s Mumbai office.
In March, Paragon announced a first close (a threshold over which it can start to invest and close deals) of $50 million for its fund. The private equity firm is looking at a final fund size of around $200 million.
While the inclination among a lot of LPs is to back existing funds and teams that have a track record, there is a significant number of LPs which are willing to bet on new funds, Parekh added. Some, he said, are looking for “smaller funds where they can be a meaningful, sizeable part of the fund". Paragon, according to Parekh, has seen interest from fund of funds and Asia-based LPs who are keen to invest in India.
One reason for the improvement in the fund-raising environment is the recent increase in the number of successful exits by private equity funds. In 2015, private equity funds returned $9.4 billion to their investors as compared with $6 billion the previous year, according to Bain and Co.’s India Private Equity 2016 report. Deal volumes rose 10% with 213 exits reported—the best in five years.
Valuations are also becoming reasonable; multinationals are looking to divest their Indian businesses; and first-generation entrepreneurs are willing to let go. Also helping is the fact that many established GPs have proven themselves and, in the process, also established that private equity is the best-performing asset class for most LPs over the long-term.
The most challenging part for a first-time fund, however, is to rope in anchor commitments— investment commitments from LPs that are the earliest backers of a fund and who generally write large cheques. Getting significant anchor commitments early on is critical in raising enough money, and attracting the right kind of investors.
Some first-time fund managers are wooing LPs as anchor investors by offering them sweeter deals.
“What is becoming increasingly common is fund managers offering better economics to anchor investors. Anchor investors are being offered a fee or carry discount. Instead of charging a management fee of 2%, funds are offering a discount, say 1.75% as fee to attract LPs," said Garg. Carry or carried interest is the amount of profit fund managers retain. It is typically around 20%.
Many first-time fund-raisers are breakouts or spin-offs from existing funds which is not necessarily a great thing. LPs see breakouts as a failure of alignment among GPs. LPs primarily bet on the team with which they partner and do not like turnover in teams to an extent that they also notice when partners talk over each other during fund-raising pitches.
The early supply of entrepreneurial fund managers came from institutional investors such as Citi, ICICI Ventures or Temasek.
But LPs are concerned about team stability when executives leave entrepreneurial Indian shops such as India Value Fund or Baring India. When partner-level fund managers walk out of established firms, it reflects poorly on all parties.
Apart from a preference for those who have done it in the past, LPs like GPs who they believe can repeat or institutionalize success.
And the nature of the relationship between LPs and GPs is changing.
Separately-managed accounts are becoming increasingly important within the private equity space. Mandates established by a single LP and one investment manager are also on the rise. Separate accounts with a fund of funds manager allow an investor to gain bespoke access to private equity funds and can span any combination of primary, secondary or direct investment strategies. For instance, Arpwood Capital founded by veteran investment banker Rajeev Gupta and Amol Jain (former principal at TPG Capital) does not have a permanent pool of capital to draw from, but finds limited partners every time it looks to invest.