Home is where the capital is

As institutional investors globally tighten their purse strings, Indian private fund managers are increasingly looking closer to home to raise funds.

This month, ICICI Venture, one of India’s oldest private equity firms, raised $250 million for the first close of India Advantage Fund (IAF) Series III.

On its own this wouldn’t be too much of an eyebrow raiser, despite current market conditions.

However, for its first close, the Mumbai-based private equity firm raised capital entirely from domestic investors such as the Life Insurance Corporation of India (LIC); ICICI Bank, the firm’s parent company; Punjab National Bank; Andhra Bank; other public sector institutions; and high net worth individuals in the country.

ICICI Venture is not the only firm raising significant amounts of capital from domestic limited partners. Firms such as Aditya Birla Capital Advisors and Reliance Equity Advisors are also tapping the domestic markets for the first tranche of their current fundraising efforts.

In fact, Ramesh Venkat, chief executive officer of Reliance Equity Advisors, which is a wholly-owned subsidiary of Reliance Capital, the financial services arm of the Anil Dhirubhai Ambani Group, recently told PEI Asia the firm was well on its way to raising the entire INR15 billion ($316 million; €219 million) interim target of its current fund from domestic investors including high net worth individuals, banks and insurance companies. The firm’s parent group has committed to make an anchor investment equivalent to 20 percent of the fund’s final size.

Venkat told PEI Asia that given the changed circumstances in the global fundraising environment, a lot of overseas investors are still not fully prepared to invest in the Indian market and “we wanted to target the domestic investor base with a sharper focus”.

What the fundraising efforts of these firms show is that the domestic market has become increasingly important for fundraising by home-grown Indian fund managers. Only a decade ago, the premier domestic limited partners such as LIC were much smaller investors in the asset class, serving only to seed a variety of funds in the country.

Today, however, these institutions have found sufficient room to manoeuvre within the regulatory constraints they face to back domestic private equity funds in a more significant manner. This, coupled with the fact that many global investors are still largely reluctant to commit new capital to private equity funds, has meant that the role of domestic Indian institutions as limited partners has increased in importance.

Nonetheless, practitioners are unanimous in their view that Indian regulators can do more to allow these firms to commit capital to private equity more freely. Today, for example, domestic banks are faced with restrictions on their allocations to private equity. The asset class is regarded as an exposure to capital markets and exposure to capital markets is restricted to 40 percent of a bank’s net worth.

The global financial crisis has served to show there is capital available from domestic sources for private equity in India. How many funds these institutions can back will be determined by how the regulatory landscape in the country shapes up in the near future.