BackLimited partners move to increase India allocations
LPs see increased opportunities to invest in e-commerce and technology companies in the country
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Mumbai: Limited partners (LPs), who invest in India through private equity (PE) and venture capital (VC) funds say they are stepping up their allocations to the country because of increased opportunities to invest in e-commerce and technology companies as well as potentially easier exits through M&As and IPOs.
One LP, which is keen on increasing its allocation to India, is the US government’s development finance institution, Overseas Private Investment Corp. (OPIC).
“We definitely want to increase our allocation to India and South-East Asia as compared to the other geographies," Brooks Preston, head of investment funds department at OPIC, said on the sidelines of a VCCircle India Limited Partners Summit last week. Preston, like representatives of other LPs present at the summit, was of the view that India was relatively more attractive than other emerging economies.
The focus will be tech, added Anand Prasanna, director at Morgan Creek Capital Management, Llc. “Going ahead, we are looking to increase our allocation to India. However, it won’t be across the board. We are most bullish on the tech sector and that is where most of the increased allocation will go."
The renewed interest of LPs—who have, in the past, been disappointed with returns and the lack of exits—comes at an opportune time for a large number of domestic funds that are in the process of raising money. Everstone Capital, Multiples Alternative Asset Management Pvt. Ltd and CX Partners have been raising capital since last year. IDFC Alternatives Ltd, the alternative investment management firm of IDFC Ltd, is also looking to raise a fourth fund of up to $500 million, Mint reported on 18 February.
Recent performance is one reason for this renewed interest in India, said Karthik Reddy, managing partner at venture capital firm Blume Ventures.
LPs seem happy with the track record of some of the top funds and some of them are contributing to new funds being raised, added Reddy, whose fund has been on the road to raise $60 million from foreign investors to invest in start-ups. Venture capital firms IvyCap Ventures and Kae Capital are also raising money, reflecting a growing interest among LPs to tap this opportunity in India
“Clearly there are two asset classes, which seem to be getting more preference from LPs…early stage venture capital and technology. A significant pool of new capital raise has found its way in the venture capital space," said Siddharth Shah, partner at Khaitan and Co., a law firm that advises investors.
An executive at an LP said his company has “invested $100 million in India in two new private equity funds" and is “evaluating allocation options". Most of the discussions he is holding is with venture capital firms raising funds, added this person who spoke on condition of anonymity as he is not authorized to speak to media.
Healthcare is another sector that is of interest to LPs.
“Some of the sectors that we would like to focus on will be healthcare and low-carbon energy," Preston of OPIC added. OPIC is currently invested in six PE funds in India.
While sentiment among LPs appears to be turning, funds will have to show more and better exits from existing investments to retain their interest.
“We continue to deploy capital into India funds, as we have done over the past several years. There does seem to be some generic LP interest in venture investing at present but, in our view, the returns are likely to be mixed," said Wen Tan, partner at FLAG Squadron Asia Ltd.
“For LPs, planning to invest in the venture asset class, it’s probably only worth doing so in the less-than-a-handful of top quality funds," Tan added.
Shah of Khaitan and Co., however, adds that a significant bump up in valuations during follow-up rounds of funding has provided some comfort.
“In terms of returns, while there haven’t been significant number of exits from this space as yet but clearly there have been significant uprounds in the portfolio companies, which seems to be giving them confidence in terms of multiples on their invested capital," said Shah.
VC firms invested in Indian technology and e-commerce firms saw among the highest exits from their investments globally in 2014. India ranked fifth in terms of exits from technology-backed investments globally, according to data by CB Insights, a venture capital database backed by National Science Foundation.
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