Private equity (PE) firms and hedge funds that had flocked to India have found a way to deal with the dearth of ideal investment opportunities: exit in droves.
Four overseas private equity firms and 25-30 hedge and sovereign funds have shuttered India operations in the past year, and more may be on their way out, experts said.
While the decrease in the number of PE investments is a fallout of the global downturn, experts said it has changed India’s private equity landscape.
In the coming months, they portend more such exits, consolidations, and worse, more defaults by limited partners (LPs)—investors in private equity firms—on their commitments.
There was more optimism a year ago, at the peak of the downturn.
Last October, UK-based Candover Investments Plc, the listed arm of European PE fund Candover, was confident about striking deals after having spent some two months in the country.
“The opportunity in India is that there’s a whole range of companies to invest in,” Jamie Paton, head of Candover’s Asia unit, had said then.
Candover exited India in September after it failed to raise a fund here to be independent of its struggling UK parent.
The firm’s asset value had reduced and it defaulted on its commitment of $1.47 billion (Rs6,850 crore) to its own fund, Candover Partners. Candover Investments froze its investments and shut its operations outside the UK.
In India, Babcock and Brown India Pvt. Ltd, UK-based PE fund Englefield Capital and FirstRand Bank Ltd, too, have shut shop. Babcock and Brown India closed as its Australian parent went into liquidation in August.
Firms looking to raise funds in India have found the going particularly tough.
“Its an uphill task now. LPs are looking at track records, returns, horizon commitments,” said the managing director of a global PE firm’s Indian arm. He did not want to be identified as his firm is raising funds.
“It’s tricky for players like us who have not been in this market for a long time,” he added.
Investors say PE is a self-correcting business. General partners, or GPs, as private equity managers are known in the industry, don’t get a second chance to impress LPs.
GPs fall off the radar if they don’t perform and investors look for more active PE managers, said Hugh Dyus, head of Asian private equity Macquarie Funds Group. at a PE conference in Mumbai on 8 October.
“During the bull run, many entities, mostly first timers, jumped on to the PE bandwagon in India. As such, there is no room for so many GPs in the Indian market,” said Raja Kumar, chief executive, UTI Ventures.
Indian PE firms such as UTI Ventures say foreign firms attracted by India’s economic growth sought quick returns. But the downturn dampened plans and LPs started piling the pressure.
“The longevity of the Indian PE industry is dependent on the longevity of the LPs. So the foreign LPs, going through the global ups and downs, may not be able to fulfil their Indian commitments or invest in India,” said Harsha Raghavan, who was heading Candover’s India arm.
For the Indian PE industry to flourish, GPs need to be backed by domestic institutions, he said.
With nearly 300 companies, the local PE market is overcrowded but India is a compelling growth story and the domestic private equity sector may see some consolidation, especially as nearly half of the global PE firms in India are performing below expectations, said investors.
According to industry estimates, the average fund size in India is around $350 million—one-third of the average size of PE funds in the US.
“It will be foreign and individual GPs who may end up shutting shops,” said Pankaj Dhandharia, partner, transaction advisory services, at audit and consulting firm Ernst and Young.
The only consolidation so far in India’s PE market has been global venture capital firm Sequoia Capital’s takeover of Mauritius-based Indian venture capital fund WestBridge Capital Partners in May 2005.
The changed PE landscape may improve the quality of investors in the long run, but the fall in the number of investors may hurt Indian entrepreneurs.
“In case of having few investors, the focus of investment may only be on large-scale funding,” said Raja Sujith, partner, Majmudar and Co., a corporate law firm.
“This may not be in the favour of majority of the Indian entrepreneurs,” Sujith added.