Private equity (PE) firms are finding it difficult to raise money as their limited partners (LPs), such as endowment funds, pension funds and development finance institutions, lay down tougher terms for investment. Fund managers, also called general partners, or GPs, say the LPs are demanding a greater share of profits and a seat on the investment committee. To assess the profitability of their investments, LPs are also looking into areas such as the team composition of PE firms. The change has been driven by a proliferation of PE firms that have little to differentiate them, and a growing perception among LPs that the market is overvalued. “The burden of proof is on GPs to explain to investors how their PE fund will be different from others,” said Harsha Raghavan, who founded Steer Capital Advisors Llp with Neeraj Bhargava and is raising funds. “Notwithstanding the growth, GPs need to segment the market and consequently help LPs identify the current set of market opportunities.” India-focused PE funds raised $1.3 billion ('5,811 crore) in the first half of 2010, or less than half the $2.7 billion raised in the first half of 2009, according to an August report by Emerging Market Private Equity Association, a non-profit independent global organization.
A total of 26 India-focused funds raised $4 billion in the year to December 2009. “LPs are questioning fund managers that in a market where valuations are so high, how can they be assured of good returns,” said Vikram Utamsingh, executive director and head of private equity at consultancy firm KPMG India Pvt Ltd. Subbu Subramaniam, who left Baring Private Equity Partners India Ltd to start MCap Fund Advisors Pvt. Ltd, said experienced professionals who have delivered returns over an extended period have a better chance to raise funds than first-time managers, as they can highlight how they did it in the past and how they hope to repeat it. “There is also an ace available-to sacrifice the economics (percentage share in returns) to effectively deliver increased (gross) returns. This sacrifice of economics by GPs will deliver better returns, provided the investments made are successful,” he said. Another area that LPs are concerned about is team composition. “LPs are looking at long-term relations…they want the team to be stable for a fund one, two, three and subsequent funds,” said Utamsingh.
This means managers such as Renuka Ramnath, Ajay Relan and Jayanta Banerjee, who moved out with entire teams to launch their own funds, will find it easier to show their team dynamics to LPs. In May 2010, Relan, who founded CX Partners after stepping down as India head of Citi Venture Capital International, closed the first fund at $515 million. Ramnath, former chief executive of ICICI Venture Funds Management Co., achieved the first close of her fund Multiples Alternate Asset Management Fund 1 at $250 million. The fund is targeting a final close of $450 million. In May 2010, Banerjee, Anand Vyas and Sunay Mathure resigned from ICICI Venture to form a new PE firm Pravi Capital and plan to raise a $200 million fund. Not all GPs are unhappy with the change, though. “It is true that LPs have become more cautious,” said Ramnath, “and as a fund manager I welcome it.”
Source: India Infoline