India PE climate set to improve

For the first time in a while, India has something of a positive story to tell. With the election of pro-business leader Narendra Modi in May, which has sparked a resurgence of GDP growth and a long-overdue feeling of optimism in the country, investors are taking calls about India once again.

At PEI’s annual India Summit in October this year, the industry gathered in Mumbai to discuss the growing sense that now may be the time to invest in India.

“This is the best environment I’ve seen,” speaker Sameer Sain, co-founder of Everstone Capital Partners, said in his keynote speech. “For the LPs in the room who are thinking about it, last year, this year and next year are going to be good vintages for private equity.”

Of course, with a $650 million fund just coming to market, Sain would say that. But he insists his beliefs are well-founded – and LPs are beginning to agree.
On a panel at the event, Hamilton Lane’s Juan Delgado-Moreira and HarbourVest Partners’ Jaganath Swamy both committed themselves to the pro-India camp. Hamilton Lane had its busiest year in the country during 2013, while HarbourVest is planning a highly active India strategy going forward.

But there is one bone of contention between GPs and LPs. Has there been enough consolidation in the market?

GPs insist there has been a real reduction in the number of active funds, meaning there’s now less competition for deals. “In 2008, there were over 200 [private equity funds in India], whereas today there are probably six to eight,” Sain explained. “We have a handful of players with India-dedicated capital. And if you look at the public markets, you have a lot of players who are putting money in. That helps with the arbitrage, because there simply isn’t enough supply [of private capital], especially in the mid-market. For a good deal it will always be competitive, but … you generally have less competition, and the competition that exists is reasonably mature and sensible.”

HarbourVest’s Swarmy agreed with the GPs that the number of funds has reduced “dramatically”. Others, however, took a different view.“Some GPs would have you believe that there are few of them left, but the reality is quite [different],” Hamilton Lane’s Delgado-Moreira said. He reckoned 75 would be a better approximation of the number of active groups. “I don’t think there is such a shrinking of the opportunity.”

Mounir Guen also pointed out that statistics had quite consistently shown that there are always around 140 Indian GPs raising capital across a number of structures each year – mostly in private equity – so the true picture remains unclear.

And according to Matthew Smith, managing director at Abbott Capital Management, the size of the GP population is not really the issue when it comes to India.

“There aren’t necessarily too many GPs – but what we’re looking for are GPs that do interesting deals, do something with them and return money to investors,” he explains. “That’s the whole cycle, that’s the way it is supposed to work – the money has to come back”.

In short, no matter how many GPs there are, LP sentiment towards India probably won’t change dramatically unless or until more of them are returning capital. And for the time being, that’s still not happening consistently enough.

Says Abbott: “If you’re not interested in providing liquidity, both GPs and [entrepreneurs], then private equity capital is probably not for you.” ?