LP sentiments are likely to get a leg up if the outcome of the general elections in 2014 is not terribly negative.
The fundraising climate for private equity and venture capital funds is yet to become balmy for India-focused fund managers but there is a silver lining which could signal a revival in confidence of limited partners or LPs in the India story. With expectations of a positive outcome in upcoming general elections and several high profile GPs waiting to hit the trail in 2014, this could be start another positive cycle in fundraising.
Private equity firms raised $3.1 billion to date in 2013, an increase of over 63 per cent as compared to the whole of 2012, according to VCCEdge, the database platform of VCCircle (venture capital funds not included). This was accompanied by a decline in the number of funds raised which fell to 25 as compared to 29 funds last year, representing large amounts raised by fewer successful funds.
Private equity fundraising hit a peak during 2007, when $8.8 billion was raised across 38 funds and in three years from 2006 to 2008 nearly $22 billion was mobilised for investments in India. This more than halved in the next three years. What’s more, 2012 saw a major slump with PE fundraising crashing to just $1.9 billion as compared to $4 billion in 2011.
Although fund managers or general partners (GPs) handling India-focused funds have just about managed to match up to the average annual fundraising for the last five years, the growth to date marks a revival after a trough in 2012.
On the flip side GPs continue to see fundraising timeline stretched to 24-month cycles as against 12-15 months in the good old days and LP tough talk on fees for managing their money. For many PE firms it’s still early days to pronounce a revival.
“Fundraising continues to be tough and it is the most difficult market I have seen in the last seven years. The sentiment on India and private equity in the country is really negative,” said an established GP, who has been on the road for over two years, on the condition of anonymity.
The India story has taken a major hit with the country facing macroeconomic headwinds like slowing economic growth, widening current account deficit and outflow of foreign investment. Besides, the PE industry is plagued with lower returns due to the high valuations paid in the boom period of 2006-2008 and relatively few exits as capital markets, main source for exits, have remained shut. This coupled with the depreciating currency and increasing corporate governance issues in portfolio companies.
Now LPs are becoming much more selective, as the PE cycle which started in 2005-2006 is coming to a close and there is a clearer distinction between performers and non-performers.
“From an India point of view, given the currency and the bad news coming on a macro level it has not been a great year for fundraising. While in the PE industry one talks about significance of vintages, the number of GPs you want to back are limited and you invest whenever they raise funds once in every three-five years,” said Anand RP, director at fund of funds Morgan Creek Capital Management.
But several GPs do believe that things have improved as compared to last year, when other emerging markets in Asia like Indonesia, Malaysia, Thailand, Vietnam and the Philippines caught LPs attention. But LPs are now increasingly realising that they cannot ignore India, and will have to invest in the medium to long term.
“The receptivity to India story has improved and there is more interest, from being positively avoidable in 2012. But that will not translate into a rush of commitments from the LPs. The perception is that India market has bottomed out on relative basis and things are not going to go worse,” said Jayanta Banerjee, managing partner at ASK
Pravi Capital, which has raised Rs 300 crore from domestic investors.
LPs feel that cases like Kedaara Capital, which raised $540 million for its debut fund and IDFC Alternatives’ $644 million first close for its infrastructure fund are more of exceptions than the rule. Only a handful of private equity funds have been able to raise more than $100 million in 2013.
Increasingly, fundraising cycles have also become longer with several GPs on the road for over two years. This has resulted in more interim closes for the fund so they could continue their investment programmes.
Take for instance, Motilal Oswal Private Equity, which finished raising Rs 1,000 crore for the second fund in August, took two years to raise the fund and made four interim closes. This is after a track record of 7x returns from its partial exit from Jaipur-based non-banking finance company AU Financiers and 3x returns from another part exit from Pune-based dairy firm Parag Milk Foods.
Fees and carry have also increasingly being negotiated, with LPs asking for lower rates than the 2:20 norm, especially in case of larger funds. Keeping a tab on the funds’ expenses to determine fees and how the carry is shared among team members is also on the agenda when GPs meet with LPs.
“There have been a lot of discussions on lower fees and sharing of carry. It can either be an existing fund manager not having the best time raising money, or a new GP trying to get an anchor investor,” said Anand.
The depreciating rupee is another factor that has affected the fees charged by GPs.
“Financial terms in most new funds are severally being negotiated in the sense that management fees that we are seeing going forward could drop by 50 per cent because of the exchange rate volatility and the performance of underlying funds even though many of our exits have been at 20 per cent to 22 per cent kind of returns; they have no meaning because of the sharp fall in exchange rates,” said Dr Archana Hingorani, CEO at IL&FS Investment Managers, on a recent analyst call.
So how are GPs adapting in the current environment? If they—especially first-time GPs—are not able to raise a fund, are working with LPs on a deal-by-deal basis. That is instead of a dedicated capital pool at their discretion, GPs temporarily work on an opportunity basis with LPs till the comfort is established.
GPs are also helping other investors manage their investments in India. “There are several investors from across the world which have made direct investments into the country and because of the last five years changes in the economic cycle have not been able to manage these investment very well,” said Hingorani on the analyst call, adding that IL&FS Investment has won two such mandates over the last six months.
Also increasingly larger private equity institutions are looking to offer managed accounts services to large LPs like pension funds and sovereign wealth funds.
But things could improve going ahead into the next year, with upcoming general elections holding a lot of hope. “I believe fundraising numbers will improve in 2014 because of several reasons. Firstly, some of the existing GPs are going to come back to the market in 2014 for their new funds which could push the numbers up. Secondly, not a terribly negative outcome from the general elections could boost the LP sentiments. Finally, we are seeing some real green shoots in the economy itself,” said Anand.
The fundraising climate for private equity and venture capital funds is yet to become balmy for India-focused fund managers but there is a silver lining which could signal a revival in confidence of limited partners or LPs in the India story. With expectations of a positive outcome in upcoming general elections and several high profile GPs waiting to hit the trail in 2014, this could be start another positive cycle in fundraising.
Private equity firms raised $3.1 billion to date in 2013, an increase of over 63 per cent as compared to the whole of 2012, according to VCCEdge, the database platform of VCCircle (venture capital funds not included). This was accompanied by a decline in the number of funds raised which fell to 25 as compared to 29 funds last year, representing large amounts raised by fewer successful funds.
Private equity fundraising hit a peak during 2007, when $8.8 billion was raised across 38 funds and in three years from 2006 to 2008 nearly $22 billion was mobilised for investments in India. This more than halved in the next three years. What’s more, 2012 saw a major slump with PE fundraising crashing to just $1.9 billion as compared to $4 billion in 2011.
Although fund managers or general partners (GPs) handling India-focused funds have just about managed to match up to the average annual fundraising for the last five years, the growth to date marks a revival after a trough in 2012.
On the flip side GPs continue to see fundraising timeline stretched to 24-month cycles as against 12-15 months in the good old days and LP tough talk on fees for managing their money. For many PE firms it’s still early days to pronounce a revival.
“Fundraising continues to be tough and it is the most difficult market I have seen in the last seven years. The sentiment on India and private equity in the country is really negative,” said an established GP, who has been on the road for over two years, on the condition of anonymity.
The India story has taken a major hit with the country facing macroeconomic headwinds like slowing economic growth, widening current account deficit and outflow of foreign investment. Besides, the PE industry is plagued with lower returns due to the high valuations paid in the boom period of 2006-2008 and relatively few exits as capital markets, main source for exits, have remained shut. This coupled with the depreciating currency and increasing corporate governance issues in portfolio companies.
Now LPs are becoming much more selective, as the PE cycle which started in 2005-2006 is coming to a close and there is a clearer distinction between performers and non-performers.
“From an India point of view, given the currency and the bad news coming on a macro level it has not been a great year for fundraising. While in the PE industry one talks about significance of vintages, the number of GPs you want to back are limited and you invest whenever they raise funds once in every three-five years,” said Anand RP, director at fund of funds Morgan Creek Capital Management.
But several GPs do believe that things have improved as compared to last year, when other emerging markets in Asia like Indonesia, Malaysia, Thailand, Vietnam and the Philippines caught LPs attention. But LPs are now increasingly realising that they cannot ignore India, and will have to invest in the medium to long term.
“The receptivity to India story has improved and there is more interest, from being positively avoidable in 2012. But that will not translate into a rush of commitments from the LPs. The perception is that India market has bottomed out on relative basis and things are not going to go worse,” said Jayanta Banerjee, managing partner at ASK
Pravi Capital, which has raised Rs 300 crore from domestic investors.
LPs feel that cases like Kedaara Capital, which raised $540 million for its debut fund and IDFC Alternatives’ $644 million first close for its infrastructure fund are more of exceptions than the rule. Only a handful of private equity funds have been able to raise more than $100 million in 2013.
Increasingly, fundraising cycles have also become longer with several GPs on the road for over two years. This has resulted in more interim closes for the fund so they could continue their investment programmes.
Take for instance, Motilal Oswal Private Equity, which finished raising Rs 1,000 crore for the second fund in August, took two years to raise the fund and made four interim closes. This is after a track record of 7x returns from its partial exit from Jaipur-based non-banking finance company AU Financiers and 3x returns from another part exit from Pune-based dairy firm Parag Milk Foods.
Fees and carry have also increasingly being negotiated, with LPs asking for lower rates than the 2:20 norm, especially in case of larger funds. Keeping a tab on the funds’ expenses to determine fees and how the carry is shared among team members is also on the agenda when GPs meet with LPs.
“There have been a lot of discussions on lower fees and sharing of carry. It can either be an existing fund manager not having the best time raising money, or a new GP trying to get an anchor investor,” said Anand.
The depreciating rupee is another factor that has affected the fees charged by GPs.
“Financial terms in most new funds are severally being negotiated in the sense that management fees that we are seeing going forward could drop by 50 per cent because of the exchange rate volatility and the performance of underlying funds even though many of our exits have been at 20 per cent to 22 per cent kind of returns; they have no meaning because of the sharp fall in exchange rates,” said Dr Archana Hingorani, CEO at IL&FS Investment Managers, on a recent analyst call.
So how are GPs adapting in the current environment? If they—especially first-time GPs—are not able to raise a fund, are working with LPs on a deal-by-deal basis. That is instead of a dedicated capital pool at their discretion, GPs temporarily work on an opportunity basis with LPs till the comfort is established.
GPs are also helping other investors manage their investments in India. “There are several investors from across the world which have made direct investments into the country and because of the last five years changes in the economic cycle have not been able to manage these investment very well,” said Hingorani on the analyst call, adding that IL&FS Investment has won two such mandates over the last six months.
Also increasingly larger private equity institutions are looking to offer managed accounts services to large LPs like pension funds and sovereign wealth funds.
But things could improve going ahead into the next year, with upcoming general elections holding a lot of hope. “I believe fundraising numbers will improve in 2014 because of several reasons. Firstly, some of the existing GPs are going to come back to the market in 2014 for their new funds which could push the numbers up. Secondly, not a terribly negative outcome from the general elections could boost the LP sentiments. Finally, we are seeing some real green shoots in the economy itself,” said Anand.
