Support systems

Raising capital to invest in India is a tough task at the moment. Slowing GDP growth, a lack of divestments and years of disappointing performance have soured LP sentiment. Only $1.67 billion was raised for India in 2012 compared to $4.2 billion the year before, according to Private Equity International’s Research & Analytics division. 
A rare breakthrough this year was Kedaara Capital, the India-focused private equity firm launched by Manish Kejriwal, formerly of Temasek, which closed its debut vehicle oversubscribed on $540 million, according to the firm. Most of the coverage of the fund close focused on the headline number, as you’d expect. But there was also another interesting aspect that escaped widespread attention: Kedaara decided to open up a $60 million tranche in local currency, to take the fund to its $600 million hard cap.The firm originally planned only to raise a US dollar fund, a source close to the firm explains. But that changed when local friends and family offices who had requested access to the fund found that they couldn’t invest in foreign currency vehicles due to Indian regulations.
Kejriwal would not comment on that. But he did note the importance of establishing a domestic institutional investor base in India. “We learned this from the China funds – there should be a deeper pocket of money in India for this asset class, but there isn’t. We want this to be a small start [to that] and hopefully grow [the domestic LP base] over the years,” he tells PEI. China’s RMB investors, by comparison, have been piling money into the private equity asset class, even if the number has decreased over the past two years. RMB funds raised a record of $26.7 billion during 2011, which declined to $1.84 billion over the first 11 months of 2013. 
Kedaara isn’t alone. The private equity arm of Motilal Oswal Financial Services in India raised $155 million across two vehicles in September. One fund raised $105 million in US dollars. The other vehicle raised INR 3.6 
billion (€41 million; $54 million) from domestic LPs, including the parent group, high net-worth individuals, family offices and the firm’s own team. The rupee fund amounts are comparatively small, but they give a taste of the asset class to domestic institutional investors and individuals, both of which are currently prohibited from committing capital to foreign funds. 
Indian regulators seem to be recognising the value of fostering a domestic LP base. In August, India’s Insurance Regulatory and Development Authority said it would now permit homegrown insurers to invest in certain alternative investment funds, according to a legal circular. Under the new guidelines, insurers may invest in Category I and II alternative investment funds, which include domestic private equity funds. But it stops short of allowing them to access offshore private equity. 
“GPs who will benefit the most are the domestic institutional GPs such as ICICI Venture or IDFC, because they will be able to raise capital from insurance companies,” says Siddharth Shah, partner at Khaitan & Co.
“But there are also smaller players who are benefiting significantly [from] insurance and bank contributions, including many of the foreign GPs who have set up domestic pools of capital.” To develop a substantial LP base, the industry has to persuade the government to loosen regulations further, sources say. The next step could be freeing Indian pension funds, the natural LPs for private equity investing, who currently can’t invest overseas – or even in their own backyard. NRaising capital to invest in India is a tough task at the moment. Slowing GDP growth, a lack of divestments and years of disappointing performance have soured LP sentiment. Only $1.67 billion was raised for India in 
2012 compared to $4.2 billion the year before, according to Private Equity International’s Research & Analytics division. A rare breakthrough this year was Kedaara Capital, the India-focused private equity firm launched by Manish Kejriwal, formerly of Temasek, which closed its debut vehicle oversubscribed on $540 million, according to the firm. 
Most of the coverage of the fund close focused on the headline number, as you’d expect. But there was also another interesting aspect that escaped widespread attention: Kedaara decided to open up a $60 million tranche in local currency, to take the fund to its $600 million hard cap.
The firm originally planned only to raise a US dollar fund, a source close to the firm explains. But that changed when local friends and family offices who had requested access to the fund found that they couldn’t invest in foreign currency vehicles due to Indian regulations.
Kejriwal would not comment on that. But he did note the importance of establishing a domestic institutional investor base in India. 
“We learned this from the China funds – there should be a deeper pocket of money in India for this asset class, but there isn’t. We want this to be a small start [to that] and hopefully grow [the domestic LP base] over the years,” he tells PEI. 
China’s RMB investors, by comparison, have been piling money into the private equity asset class, even if the number has decreased over the past two years. RMB funds raised a record of $26.7 billion during 2011, which declined to $1.84 billion over the first 11 months of 2013. 
Kedaara isn’t alone. The private equity arm of Motilal Oswal Financial Services in India raised $155 million across two vehicles in September. One fund raised $105 million in US dollars. The other vehicle raised INR 3.6 billion (€41 million; $54 million) from domestic LPs, including the parent group, high net-worth individuals, family offices and the firm’s own team. 
The rupee fund amounts are comparatively small, but they give a taste of the asset class to domestic institutional investors and individuals, both of which are currently prohibited from committing capital to foreign funds. 
Indian regulators seem to be recognising the value of fostering a domestic LP base. In August, India’s Insurance Regulatory and Development Authority said it would now permit homegrown insurers to invest in certain alternative investment funds, according to a legal circular. 
Under the new guidelines, insurers may invest in Category I and II alternative investment funds, which include domestic private equity funds. But it stops short of allowing them to access offshore private equity. 
“GPs who will benefit the most are the domestic institutional GPs such as ICICI Venture or IDFC, because they will be able to raise capital from insurance companies,” says Siddharth Shah, partner at Khaitan & Co.
“But there are also smaller players who are benefiting significantly [from] insurance and bank contributions, including many of the foreign GPs who have set up domestic pools of capital.” 
To develop a substantial LP base, the industry has to persuade the government to loosen regulations further, sources say. The next step could be freeing Indian pension funds, the natural LPs for private equity investing, who currently can’t invest overseas – or even in their own backyard.