Capital crunch

One of the more notable aspects of this year’s PE Asia 30 (see previous page) was the complete absence of any India-based managers. 

“There was a time when pretty much any India fund would get funded,” recalls Vikram Raju, senior global funds specialist at the IFC. But times have changed. “The global LP community is being a lot more discriminating now in terms of what kind of Indian GPs and strategies they’re backing. India has been perceived as being more challenging [than] other emerging markets.” 

India has been perceived as being more challenging [than] other emerging markets

Vikram Raju

Some of the slowdown evident since 2008 may be due to the surfeit of capital raised in the two preceding years. 
A recent Bain & Co. report estimated that India-focused funds still had nearly $20 billion in dry powder – “enough to fund all deal activity at 2010 levels for the next two years”. So the drop in fundraising could be a sign of “normalisation rather than [India] being less attractive,” says Rishi Navani, managing director at Matrix Partners India (which closed a second fund on $300 million earlier this year). But that doesn’t tell the whole story.


Slower-than-expected investment activity is one concern. Although a record number of deals closed in 2010 – 380, up 75 percent year-on-year, making it the busiest Asian market in volume terms – that figure represented just 1 percent of companies attracting private equity interest, according to Bain. And while exit activity also hit record levels (of $5.2 billion), about 60 percent of the companies that Indian funds backed through 2007 remain in their portfolios. 

“The story Indian GPs have been selling to LPs turns out to be not as easy to execute. Promises were high but sustainable successful delivery is still a question mark,” says Markus Ableitinger, head of Asian investment management for advisory group Capital Dynamics. So track record continues to be a thorny subject.

Regulatory confusion doesn’t help, either. The Securities and Exchange Board of India wants to standardise the oversight of India’s alternative investments sector – the idea being to level the playing field and provide more protection for investors. Some argue that this will help attract more institutional capital to the country – but others are worried about the scope and complexity of the proposed new rules.

Larger Indian companies look at private equity money only as money and nothing

Jayanta Banerjee

There’s also a perception issue to address. “Larger Indian companies look at private equity money only as money and nothing more,” says Jayanta Banerjee, managing partner and co-founder of Pravi Capital, whose debut fund is targeting $200 million. 

This is partly the fault of Indian managers, says Anubha Shrivastava, managing director for Asia at UK’s CDC Group. “We need to see mindsets moving away from [that of] a pure financial player and a provider of capital, to more of an interventionist value-added role – being a part of the company rather than just being a provider of capital.” The groups likely to attract the greatest interest from institutional investors are those with both industry and financial experience, she believes.

“LPs are going to place fewer bets than they did previously, and likely concentrate their bets in 10, 12 or fewer managers that have a good combination of track record, strategy and team,” agrees Matrix’s Navani. 

India still has a strong growth story to tell: GDP growth is still expected to dramatically outpace Western economies in the coming years, while roughly half of the country’s 1.21 billion population is under the age of 25. And compared to most emerging markets, India offers a deep talent pool, with well-developed operational skills. 

So the long-term trends are positive. But will all the 120 funds Bain estimates to be in the market in 2011 – seeking a collective $34 billion – meet their targets? Currently, it looks unlikely.