MacKay: Indian GPs should rethink fund structures

Hermes GPE chief Alan MacKay told delegates at the PEI India Forum that LPs are being put off Indian private equity because of the time it takes to receive distributions.

India’s “real challenge” from an LP perspective is that GPs have “not yet demonstrated capital velocity”, unlike other emerging markets like Brazil, Alan MacKay, chief executive officer at Hermes GPE told the audience at this year’s Private Equity International India Forum.

“If you put $100 million to work in Brazil this year, almost certainly $80 million to $120 million will come back to you within five years’ time. In India will it be back in five years? I don’t know,” MaKay said in an onstage interview at the Mumbai event.

This perceived lack of realisations is holding back fresh inflows of capital into the country’s private equity funds, MacKay stated. However, rather than rush exits to pacify LPs, Mackey suggested GPs should adapt fund structures to better suit the timeframe needed for private equity investment in India.

“India has just adopted the typical private equity fund structure, charging 2 and 20 etc. Is that actually relevant here given the longer timeframe firms are having to hold some of these investments for?” he asked.

India has just adopted the typical private equity fund structure, charging 2 and 20 etc. Is that actually relevant here given the longer timeframe firms are having to hold some of these investments for?

Alan MacKay

Referring to a keynote address given earlier at the conference by the chairman of India’s ICICI Bank, KV Kamath, who predicted India’s meteoric growth rate would sustain for another 20 years, Mackay stated: “India has a huge, long timeframe for growth, and therefore a huge, long timeframe for returns and yet everyone is trying to squeeze these investments into the typical 10-year window. Instead of ignoring the disconnect, my advice is to address it.”

MacKay went on to say that the problem with “taking fund structures off the shelf” was not limited to the Indian market, but was in fact a global issue.

“Everyone’s been lazy,” he said. “GPs launch a fund and charge 2 and 20, LPs charge 1 and 10. But it’s not differentiated – you can be only an average GP and still get 2 and 20. We need to wake up to it.”

MacKay continued by telling the GPs in the audience at the Forum that they needed to be “clear and confident” about the differentiated nature of their industry.

“There are some GPs who think they need to go through the same evolutionary stages as the US [private equity industry]; there are other, smarter GPs who say ‘well we can learn from their mistakes and just leapfrog forward’.

“I think some of the smarter GPs might do some thinking about [fund structures] – and if they do, there might be some receptive LPs,” he concluded.