October 2009
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Unhappy LPs limit funds to PEs, VCs

Private equity (PE) and venture capital (VC) funds in India have tightened their purse strings. That’s because limited partners (LPs) – the main source of funding for venture capitalists — are reducing their exposure in this space. As per industry estimates, there has been a drop in new investments to the tune of 71% during the first nine months of 2009 as compared to the same period last year.

Industry observers say limited partners are miffed with the returns shown by the general partners, who manage the fund and its operations on a daily basis, say industry observers. “Clearly, many LPs are looking at better returns and shorter investment term cycles,” says Sameer Mehta of Atlas Advisory.

Some funds have been instructed by their LPs to conserve cash and value in the existing portfolio. Some limited partners are not investing in private equity funds on an incremental basis, says Srini Vudayagiri of Angel Investor. This assumes significance in the current context because it’s tough to raise fresh funds, and the competition to attract limited partners to VCs is quite intense. With limited partners in demand, they are also extracting their pound of flesh.

A venture capital firm is usually structured in the form of a limited liability partnership and people who invest in it are limited partners. Seen in the Indian context, the bulk of venture capital inflow is from overseas markets like the US and Europe, with limited partners mostly being institutional investors such as pension funds and insurance companies and family offices (high net-worth individuals) who are mostly based out of the US.
Source: Times of India

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