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Foreign investors in venture capital and private equity funds in India are overall disappointed with the recent performance of fund managers, says the sixth Annual Report by IIT-Madras on Indian Venture Capital and Private Equity – The Fuel for Wealth Creation.
This has hit foreign capital providers’ allocations to funds in India. Fund managers have to ensure better returns on their investments to make them interested in Indian funds again.
A press release quoting Thillai Rajan, Associate Professor, Department of Management Studies, IIT-Madras, who is the editor and co-author of the report, says the 2014 findings are based on a sample of 940 commitments, 420 capital providers and 1,058 investee companies.
They are analysed in two stages – the funds in which the capital providers have invested, and the various companies in which the funds have invested.
The study also says foreign capital providers outnumber domestic investors in the ratio of 3.67 to 1.
In terms of the number of commitments the ratio is 2.77 to 1. Thus, there is a strong dominance of foreign funds in the source of risk capital for Indian firms, it says.
Besides, domestic capital providers commit significantly lesser amount per commitment, compared with foreign capital providers (ratio of 1:2.9).
Foreign investors’ commitments with reference to the lifecycle stage of the investee company show that domestic investors have a higher share of commitment amount to venture funds that provide early stage capital.
An implication for policymakers is that creating a framework that facilitates more commitment from domestic investors can increase the capital available for venture funds.
The study also indicates that in recent years, domestic family offices, high net worth individuals and retail investors are more inclined to invest in private equity funds.
Overall, investors seem to have a better understanding of the PE asset class in 2013-14, compared with what it was during the 2005-07 boom period.
Getting ordinary retail investors in the PE segment would continue to be a challenge because of the regulatory framework as well as the poor understanding of this asset class among this segment. However, recent innovations such as crowd funding platforms are an attempt to reach out to the retail investors who are interested to invest in start-up equity, the report says.
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