June 2013
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Investors no longer keen on buyout funds

Large buyout funds may have problems raising investments, with limited partners, or the individuals and entities that put money into private equity and venture capital funds not keen to invest in those that are involved in transactions worth $1 billion (around Rs.5,500 crore) or more, a study shows.
And India, besides China, isn’t as popular as it once was because of the indifferent performance of fund managers here, the study also found.
According to Coller Capital’s Global Private Equity Barometer, released Monday, and based on a survey of 140 global private equity investors, around 88% of limited partners are not very keen to invest in large buyout funds.
Coller capital is a top investment firm in the international secondary market.
Still, the report added, it isn’t as if private equity is going out of fashion, with two in three limited partners saying they will continue to invest as before in private equity funds. And the third that said it would slow investments, ascribed a corresponding slower pace of investments by the people managing the funds (or general partners) as the reason. And to continue to retain this confidence, private equity funds will, simply, have to perform, said Jeremy Coller, chief investment officer of Coller Capital.
“Private equity has confirmed its core place in institutional investment portfolios since the crisis,” said Coller. “However, complacency would be a mistake. With skeptics at senior levels within limited partner organizations, the industry will have to justify its performance again and again.”
Indeed two out of every five companies, and one in three pension funds surveyed said influential individuals within their organizations believed that less money should go to private equity funds.
Investors also seem to have lost their interest in India- and China-specific funds, said Hiro Mizuno, partner at Coller Capital, on the phone from London. China has a backlog of IPOs that provide exits to private equity funds and in India, general partners have not proven themselves, Mizuno added. “Fund managers in India have to prove their worth in terms of returns to limited partners to have them in their global portfolio.”
Meanwhile, a third of limited partners surveyed plan to increase their exposure to credit investments in the next 12 months, said the Coller report. Half of the limited partners have either invested or are considering investment in private debt funds, which barely existed before 2009.
Moreover, corporate disposals, secondary buyouts, and sales by entrepreneurs are expected to provide good PE opportunities in Europe and North America in the next couple of years.
And over half (58%) the limited partners also expect bankruptcies and Chapter 11 filings to provide good PE investments. One in five LPs sees attractive PE opportunities in the Middle East and North Africa in the next few years, the report added.
In Asia, limited partners said they would seek greater exposure to Indonesia and Malaysia. However, Mizuno said while exposure to India and China may go down, it does not mean that the same amount can be invested in countries such as Thailand or Malaysia because they are very small markets.
“Though interest has waned, limited partners, like other investors, are fundamentally attracted to the large consumer demand story in India and, over time, there will be capital for investing,” Arpan Sheth, who leads Bain and Co.’s PE practice in India, said in mid-May. The larger challenge for investors, he added, would be to find high quality companies to deploy capital at reasonable valuations.
That said, capital available for investment in India seems to be drying up.
PE funds entered 2013 with $11 billion for investments—nearly a third lower than the $17 billion they had in January 2012, according to UK research firm Preqin.
India received only $3.5 billion of the $311.7 billion funding raised globally by private equity funds in 2012, compared with $7 billion of the $311 billion in 2011.
Source: Livemint

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