2010: Year of new faces in Indian PE

India Inc, which made a tremendous comeback following the recession, brought much cheer to a maturing sector - private equity.

The abundance of funds available in India attracted many more PE veterans to quit their jobs to start their own firms, with fundraising plans.

P R Srinivasan, Subbu Subramanian, Rajesh Khanna, Jayanta Banerjee and Varun Sahni are a few seniors who did so in 2010 and are busy with fundraising procedures.

Though other experienced hands such as Renuka Ramnath and Ajay Relan could successfully raise funds in 2010, one is yet to know the fate awaiting these new general partners (GP or fund managers).

Charles Daugherty, managing partner, Stanwich Advisors Llc, a US-based placement agency, which helps GPs for fundraising abroad, said, "There are too many GPs that are trying to raise capital on Wednesday, yet only a fraction have proven that they can consistently source high-quality deals at attractive valuations and return capital to their investors. We have spoken to investors who track approximately 300 different GPs in India, but they claim only five to ten of those GPs are 'investible', meaning they have the relevant skill sets and evidence to demonstrate they'd be successful in returning capital to their investors."

Subbu Subramanian, former partner, Baring Private Equity, set up MCap Fund Advisors and is engaged in raising funds. P R Srinivasan, former head of Citi Venture Capital International, set up Exponentia Capital and plans to raise a $400-million fund.

Former Warburg Pincus managing director Rajesh Khanna is raising money for his firm,Arka Capital. Jayanta Banerjee, ex-ICICI Venture director, has floated his own PE firm, Pravi Capital, a $200-mn PE fund, with former collegues. Varun Sahni, formerly with Acumen Fund, has launched Global Impact Investors.

Said Subbu Subramanian, "The investors wish to have a verifiable track record that is supported not only quantitatively in terms of the numbers but also qualitatively in terms of contribution made to portfolio companies. The reasons for professionals to start their own fund management initiatives include economics, ideology and style issues, importance; of the institution towards India and a vision to create and build."

In 2010 in India, as many as 27 raised $13 billion, against $8 bn from 22 funds in 2009. However, the new GPs are yet to convince the limited partners (investors) of their track record.

Credentials

Daugherty said, "Indian GPs have, for the most part, been investing for a short period of time. Most have very limited track records and, as a result, lack sufficient or prototypical evidence to demonstrate they can identify good companies, perform due diligence, finance them, create value, and then sell them to return cash to investors. Some track records have a few realisations but most investments are still shy of liquidity events."

Vikram Utamsingh, head, Markets and Private Equity Advisory, KPMG India, said, "Investors want to see a team with a track record, as they gain comfort in the fact that if the team has worked together well successfully, then there is less risk of the team breaking up before the end of the fund life. Investors are also looking long-term and want to build a relationship that will be sustainable across more than one fund, i.e. fund 2 and fund 3 as well. Thus, an established team is their most sought-after criteria."

CX Partners, floated by the former head of Citigroup Venture Capital International, Ajay Relan, made its final close at $515 mn this year. Renuka Ramnath, former CEO of ICICI Venture, raised $250 mn as the first close for her own PE venture, Multiples Alternate Asset Management, in 2010.

Others who successfully raised the funds include Aditya Parekh, son of HDFC chairman Deepak Parekh. His Faering Capital, promoted with Sameer Shroff, could raise about Rs 750 crore (Rs 7.5 billion) this year from the domestic market. N R Narayana Murthy, chief mentor of Infosys Technologies, also closed his Catamaran Venture Fund with a corpus of about $130 mn.

Deviating from typical investors in the US or Europe, Indian GPs have started exploring new sources for the funds.

Daugherty adds, "Asian funds-of-funds have raised a substantial amount of money globally and are arguably the largest source of capital for Indian GPs, as they have a pool of capital that must be invested with Asian GPs, with the largest allocations typically reserved for China and India.  While Middle Eastern LPs, represented primarily by high net worth individuals, family offices, and sovereign wealth funds, significantly decreased their investments to private equity funds following the financial crisis, the region has been a large source of capital for PE in recent years and interest in India and emerging markets in general has increased."

Subbu said, "Investors from the Middle East were earlier going through advisors in the USA or UK, usually based in New York or London. Now, they have started coverage directly. This has resulted in changing decision-making equations and it seems the Middle East has emerged as a new class of potential LPs."