PE funds tap into new group of Asian investors

PE funds tap into new group of Asian investors

India-focused private equity (PE) funds have historically sourced money from so-called limited partners, or LPs, (institutions and individuals who invest in such funds) in the US and Europe.

But, the singular dependence on these markets may now be on the wane, albeit slowly, as Asian LPs begin to make inroads into the Indian PE market.

PE investors say that the interest from LPs in the region has consistently grown during the last two-three years. Some of these institutions have deployed money as part of global or pan-Asia funds, with a mandate to also invest in India. Some have invested directly in India-specific funds.

For instance, Asian LPs composed 70% of IDFC Private Equity Co. Ltd’s second fund, which raised $440 million (about Rs1,747 crore); the firm is a subsidiary of Infrastructure Development Finance Co. Other instances include Beacon India Advisors Pvt. Ltd (sponsored by Dubai-based Baer Capital Partners), Helion Venture Partners and Baring Private Equity Partners (I) Pvt. Ltd.

According to industry estimates, Asian LPs account for upwards of 10% of the PE money currently raised or allocated to India. In 2006, the total PE money raised for India was $2.88 billion, according to the Emerging Markets Private Equity Association (Empea). For 2007, the estimate is $663 million through June; this not factoring in the surge of billion-dollar and half-billion-dollar funds announced later in the year. There is no publicly available data on the region-wise sources of LP money flowing into India, and consultants to LPs such as US-based Cambridge Associates Llc. do not release their data.The Asian LPs most often named by PE investors include Abu Dhabi Investment Co., Asian Development Bank, Dubai International Capital Llc. and Government of Singapore Investment Corp. But LPs scoping out India run across the region.

As Asian LPs expand their footprint in India, fund managers have an opportunity to diversify their investor portfolio and protect themselves from the ripple effects of foreign economic slumps. Fund managers felt the need for a diversified investor base acutely after the US Internet bust that started in 2001 and led to a three-year slump in investing activity. With more than 90% of India’s PE money inflows dependent on the US at the time, fund managers often found themselves unable to close deals because the money committed by their US LPs never came through.

Deepak Shahdadpuri, founder and managing director at Beacon, says there should be a mix of investors—endowments, fund-of-funds, family offices, corporates, etc.—and geographical diversity so that there is a mix of LPs from across the US, Europe, Asia and Western Asia. “The ideal mix and geographical diversity depends on each fund," he says. “At Beacon, we are looking at 40% from Europe, 40% from West Asia and 20% from the rest of the world." The factors that pull any LP to India have been simple and universal: a chance for returns upward of 30%. But the difference in Asia is that, besides the most prominent investors mentioned, its LPs have been late to recognize or prioritize the India story. Their interest in India is picking up now as this market has shown profitable exits. “All along it was a notional mark to market," says Luis Miranda, president and CEO of IDFC Private Equity. “Today people are seeing cash returns."

India might also have some advantages over its Bric (Brazil, Russia, India and China) peers in having a more open way of conducting business.

“The biggest single source of increased interest in fund-of-fund investment in recent times is from the Middle East," says Somak Ghosh, president of corporate finance at Yes Bank Ltd. This shift seems to come as various factors push those economies to look to new places for investment like never before.

But, most importantly, “the Middle East interest will increase because of oil prices creating a huge surplus there," says Jayanta Banerjee, managing director and head of PE and growth capital at Lehman Brothers. “There are relatively less questions about India than other emerging markets from a risk-return profile."

Meanwhile, Mizuho Bank Ltd, Sumitomo Trust and Japan Alternative Investment Co. have made investments, according to industry sources who did not want to be named. The sources added that Japan has great untapped potential as a source of LPs.

Varun Sood, managing partner at LP Capvent India Advisors Pvt. Ltd, said: “Normally, they (the Japanese) are the last to come in." The investment level from any of Asia’s LPs will largely depend on how much extra cash they have and how they allocate to PE as an asset class. Says Sood: “You can’t just invest in PE when you don’t have a surplus."