In view of exit problems, the relationship between private equity investors (limited partners) and fund managers (general partners) active in India over the past few years have undergone a change. High entry valuations still hinder investments in India. Arpan Sheth, head of the India private equity practice of consultancy firm Bain & Co, which recently conducted a study among PE players, in an interview shared with Business Line some of the firm’s insights into the changing private equity investment scenario. Excerpts:
Have India-dedicated funds been declining in the recent years?
Yes, India-dedicated pooled in funds by limited partners (LP) have declined in recent years. PE investors collected an estimated $17 billion worth of “dry powder” — dedicated money — for 2012 to put to use in India, 15 per cent less than the $20 billion they collected for 2011. In 2013, the corpus went down further to $8 billion.
General Partners (GP) surveyed by us believe that fund-raising will continue to be tough due to macroeconomic challenges and their (PE funds’) poor experiences in the past.
GPs are now focusing on building good investment and exit records. GPs are also trying to differentiate between industry expertise and credibility.
The LP-GP relationship has become more interactive. LPs are now more stringent when allocating funds and are showing increased involvement in deal making and fund disbursal. LPs have also lowered their return expectations. In line with global trends, India has also witnessed a slow but steady movement towards direct investments by LPs. Even though there is competition for deals, valuations seem to be rationalising as PE funds have become more selective in evaluation and are sticking to their investment philosophy.
Is there any change in the investment horizon? Would buyout deals grow in India?
GPs feel positive about the potential to generate returns in India, but agree that the investment horizon will continue to stay on the longer side.
India continues to be a predominantly minority stake market; 50 per cent of the deal flow is driven by early stage deals. However, buyouts will continue to increase.
Are the PE firms active in India planning to expand their team strength?
PE funds are strengthening their portfolio teams and more than 50 per cent of PE funds we surveyed intend to expand portfolio teams in the future.