'India is more transparent than China'

Given the rising number of private equity players, offshore limited partners or global investors are playing an important role by keeping investment managers under a watchful eye.

Abbott Capital LLC, a US-based private equity investor since 1986, is actively scouting for opportunities in India.

In his first visit to India, Matthew M Smith, managing director, Abbott Capital, says that Indian general partners (GPs) are more willing to talk portfolios, both good and bad, in the initial meetings.

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How do you see the investment climate in India?

Currently, Abbott has exposure to PE investments in India, either through US-based or global groups. Most of these have offices in India and people on the ground.

We understand the demographic trends in India's favour as an investment option, and think that PE is poised to aid in value-creation.

Abbott is a cautious investor, and we know India has its challenges too. Infrastructure is weak or lacking; inflation and unemployment are high.

From a PE perspective, there are a lot of GPs and a lot of money has been raised in a fairly short period of time.

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Is the entry of too many independent GPs in India a matter of concern?

Throughout the history of private equity, people have complained about too much money chasing too few deals. It remains a constant complain.

Having said that, there are around 450 GPs in India. As we met groups, it became obvious there were a lot of firms targeting the same deal size in similar sectors.

In a highly intermediated market, that's a recipe for high prices. From a limited partner (LP) perspective, that means thorough due diligence still remains important. India's growth rate is phenomenal, especially when compared to the US or Europe.

However, growth can hide a lot of sins too, and, as an investor, the trick is finding GPs who are doing more than simply enjoying that underlying growth.

GPs have to do more to earn 2 and 20 (2 per cent management fee and 20 per cent outperformance fee), and it is LPs' job to find the right groups.

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What is the criterion for disbursing money to GPs? What's your approach towards a first-time fund?

Alignment of interests, team stability and track record - our diligence is geared to understanding each of these elements.

With a first-time fund, it can be very difficult to gauge all of these. We're reluctant to back a team that hasn't had some kind of experience, working together, for example.

In certain 'hot' markets, individual GPs seem to have a propensity to jump the ship once they've had a few good deals and made a name for themselves.

They either start their own shop or get poached for a higher compensation. You can never be sure about the future.

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However, teams that have stuck together during good as well as bad times, are, we think, generally a safer set of hands for our clients' capital.

Also, their track record speaks for itself.

It's hard, though not impossible, for a first-time fund to show the ability to put money to work and, and, this is central to realising investments successfully.

Though there are some first-time funds with all these elements, they are rare.

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After the downturn, LPs are cautious. What are the new measures being taken?

It's not just a matter of picking a country or a sector and putting the money to work.

It's a matter of choosing the right people as partners for the next 12 years. We need to understand the alignment of interests and team dynamics.

Also, why, of the 450 GPs out there, we've committed to this or that group. We've learned some lessons we will certainly incorporate into our process.

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Post the recession, are the US and UK markets in demand?

PE funds in the US and Europe generated a good deal of liquidity last year, especially in the fourth quarter.

That's always welcome for LPs, especially after a fairly dry spell. Fundraising will certainly rise in 2011, but, that's because 2009 and 2010 were so slow.

LPs are keen to invest in the small buyout space in particular. However, a number of larger/mega funds are also in the market.

Most LPs seem to think emerging markets will strongly outperform Europe and the US, so expect continued inflows.

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Which country do you prefer - India or China?

Till date, we haven't committed to any GP based in India or China, although we're getting closer to doing so.

It would certainly be easier for Abbott to replicate the kind of in-depth due diligence we do in India, in China.

First, I don't speak Mandarin. Further, the level of transparency I have encountered in India is much higher than China.

People here have been much more willing to discuss their portfolios, both good and bad, in initial meetings. It may take more meetings with a group in China to achieve the same level of transparency.