A Billion Dollars in the Kitty, But these PEs Have Nowhere to Invest
Six firms seek extension of fund tenures; some even return cash to investors
SNEHA SHAH MUMBAI
Half
a dozen private equity funds are yet to invest half the money they
raised in 2010 and 2011 due to scarcity of quality investment options in
a slowing economy, and have now sought their investors’ nod to extend
fund tenure. Barings Private Equity Partners, Avigo Capital, Ascent
Capital, Aavishkaar, Peepul Capital and Everstone are yet to deploy $1
billion (or about . 6,000 crore) out of the $2.1 billion raised in 2010
and 2011.
Typically, a private equity fund in India has a lifespan of seven years — first three years to invest and another four to manage the portfolio companies and exit.
Rahul Bhasin, managing director and CEO of Barings Private Equity Partners India, says its limited partnership investors have agreed to extend their deadlines by a year. “The LPs (limited partners or passive investors) know the situation on the ground and would rather want GPs (general partners or fund managers) to wait than deploy capital in a hurry,” he says. “They (LPs) are forthcoming in extending the deadline by a year or two so that the money is invested in quality companies.”
Some funds have even partially returned the money they raised to investors. India Value Fund, which raised $725 million, the highest until now by a local fund, returned $150 million last year, as it could not find good companies to invest.
Though India fund managers promised a higher rate of returns exceeding 25% earlier, they now say the LPs have recalibrated their return expectations to 16-18%. “In a tough macro environment it is better to hold the cash and invest when clarity emerges,” S Harikrishnan, managing director at Avigo Capital, says. “The extension of investment period also validates the LPs’ confidence in the revival of the Indian growth story,” he adds.
Fund managers have sought tenure extension as they expect an economic turnaround in two years. Until now, private equity funds have invested roughly $60 billion, but various industry estimates show that only one fourth of it has been returned through exits. Experts attribute this to the high valuation when the money was invested in the vintage years of 2005-2008 and compromises the funds made on due diligence and enforcing corporate governance.
“A lot of money chased a lot of companies that never deserved capital. The current mess is a result of that.” Sanjay Nayar, India head of global fund KKR, says. The extension in investment period also means the managers get more time to exit the companies they have already invested in.
Consultants say that in most cases, this is not a good time to exit because the slowing economy and a weaker currency led to mismatch in performance of companies and expectations of PE investors. “The weakness in the economy has resulted in most companies underperforming expectations,” Vikram Hosangady, head, PE advisory at KPMG India, says. “This is not an opportune time to exit given the depressed earnings and…the state of the capital markets,” he adds.
According to Venture Intelligence, which tracks PE and Merger & Acquisition deals, around 15 funds raised close to $3.8 billion in FY10, while around 27 funds collectively raised $4.2 billion in FY11. Some funds, which raised money from large sovereign and pension funds, have tweaked their investment strategy and extended the fund life. “We have raised money with a fund life of around eight years as against a typical real-estate fund that has a lifespan of five years. This is because we feel that in today’s scenario we need more time to deploy capital, manage companies and then seek exits,” says S Sriniwasan, chief executive officer of Kotak Realty Fund, which raised around $200 million towards the first close of its $400-million fund.
Deal closure in a slowing economy takes a longer time as investment council or committee that includes representatives from investors and fund managers seek more disclosures on corporate governance. “Today the investment council or panel of a fund is rejecting more proposals than ever before. Around four out of five proposals taken to the council are being rejected on account of poor governance standards in the company, high valuations and lack of clarity on growth of the company,” said the India head of a global fund on condition of anonymity.
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