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Limited PE partners take the solo route

In a trend that may affect private equity (PE) inflows into the country, many institutional investors of PE funds are abandoning these funds to make their own investment decisions. With global downturn affecting PE returns, these institutional investors, or limited partners, have raised doubts on the ability of fund managers, or general partners, to maximise investments and justify their high management fee, which is typically not less than 2% of the corpus.

A large UK-based PE firm, which recently announced a $1.2-billion infrastructure fund to invest in power, port and road projects in India, has seen its limited partners declining to go ahead with their commitments, an industry executive said.

These partners, mostly institutional investors, are taking their own decisions and co-investing with the fund in target companies, said the executive who requested not to reveal the identity of the company.

Co-investment is typically made outside of the existing fund and co-investors rarely pay management fees on an individual investment. Limited partners of Blue River Capital Advisors, a Mauritius-based PE firm focused on India, too, are making a case for co-investment, said another industry executive.

A Blue River Capital spokesman said its investors are seeking to increase exposure to India by investing both in the fund and along with it when co-investment opportunities arise. “We have not had an instance where an investor sought a co-investment opportunity before investing in Blue River Capital.”

According to Blue River Capital, the participation of its limited partners — mainly institutional investors with exposure in various industries — as co-investors may bring strategic insights, industry and operating knowledge into portfolio companies. Its portfolio companies include textile firm KPR Mill, Aurangabad Electricals, KMC Constructions and Rane Holdings, among others.

Limited partners in the infrastructure PE fund, which recently committed $150 million to a port project in India, are also mulling options to change the fund managers due to its poor performance, the first executive said.

According to Vikram Uttam Singh, head of KPMG Private Equity, general partners of private equity funds operating in India have yet to develop the competencies required to be effective in providing operational and strategic support to portfolio companies.

“Unlike their western counterparts, GPs (general partners) invest largely in unlisted firms that require ‘smart capital’. This means that PE managers must possess operating skills along with financial and strategic skills,” he said.

Smart capital is capital that comes with the support to grow and expand firms. While the four-year bull run that ended in the first half of 2008 saw most private equity firms give returns of more than 30%, the recessionary conditions, post the Lehman Brothers collapse, affected the profitability of most unlisted companies, which in turn hit PE returns.

A recent report by consulting firm KPMG said that the global downturn is expected to reduce endowment and foundation contributions into private equity funds by 17%.

KPMG, which has done a joint survey with Stanford University’s Shorenstein Asia-Pacific Research Center on the impact of global financial crisis on private equity in India, said limited partners are frustrated with the Indian PE market, particularly on corporate governance and portfolio risk.

According to them, investing in unlisted, family-owned firms poses challenges of corporate governance, raises operational risk and tenure of investment, and increases reliance on deal intermediation.

It’s not any better in the recession-hit west where co-investment by limited partners is picking up steadily. Many private equity firms offer co-investments to their largest and important investors as an incentive to invest in future funds.

Recently, London-based Inflexion Private Equity Partners closed a co-investment vehicle for its 2006 mid-market buyout fund at £75-million (about Rs 600) hard cap. The private equity firm said the fund will co-invest in new deals alongside the £165 million (about Rs 1,320 crore) 2006 Inflexion Buyout Fund.

Source: Economic Times

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