The lack of exits with good returns, depreciation of the rupee and a decline in growth rates have left a number of private equity (PE) funds in the lurch, with many firms unable to close funds since 2010.
Between January 2010 and September 2013, 125 India-dedicated PE funds went on road to raise approximately $19 billion cumulatively, as per data provided by VCCEdge, the financial research platform of VCCircle.com. However, at last count, only 60 India-dedicated PE funds had managed to raise a total of $6.2 billion over the period.
Moreover, the top five funds launched in 2010 are either still on the road to complete fund raising or have cut down on the originally planned fund size.
Among these, ICICI Venture's Indian Infrastructure Advantage Fund has been on the road since 2010 with an initial target of $750 million. As per sources, the fund has so far managed to raise $270 million and is still expecting more commitments from its limited partners (LPs).
In the meantime, Enam Holdings' PE investment arm, which had attempted an external fund raise in 2010 with a target of $750 million, shelved its plans within a year, citing fund raising issues and decided to continue as a proprietary fund instead.
Tata Capital Growth Fund also changed tracks and reduced its planned fund size to slightly over $350 million compared to the $400 million target set at the time of the launch. The fund has deployed 35% of the money raised in 2010. “The economic downturn, forex depreciation and limited exit opportunities have made it difficult to raise money. Existing funds are facing difficulty in showing exits,” says Pramod Ahuja, partner at Tata Capital Growth Fund.
Even veteran fund managers are finding it difficult to reach their first close due to the uncertain economic and market environment. Exponentia Capital, run by seasoned fund manager PR Srinivasan, has only managed to raise $60 million for its $400-million targeted fund. Former Axis Private Equity head Alok Gupta, who launched a private equity firm, AlphaInsight Ventures LLP, had to shut shop within a year due to lack of funds. He later joined US-based Gerken Capital Associates as managing director and India head.
Another PE firm, Arka Capital's plans to raise $400 million had to be shelved after a year as it failed to attract investors. The firm was launched by Rajesh Khanna, a former Warburg Pincus veteran; Rohit Kapur, a former KPMG corporate finance practice head; and Cyrus Driver, then head of Helix Investments in India.
Of the three, Driver has joined Switzerland-based private market investment manager, Partners Group, as managing director and India head. “It is no longer about the fund managers now. The LPs want to wait and watch because the environment is extremely volatile and they have not seen any fundamental changes happening. Investors usually wait before an important event and then take a decision accordingly. Since elections in 2014 will be a big event, we can expect more capital coming in after that,” said a senior fund manager.
PE firms, along with sovereign funds, have invested $30 billion in India between 2010 and August this year, as per data provided by consulting and audit firm Grant Thornton. “Clearly, 2012 had a decline compared to 2010 and 2011 largely due to the Vodafone and other tax/regulatory issues. If one goes by 2013 numbers to August and expectations for the rest of the year, we expect total investments in the same ballpark in 2013 as in 2011/2010 which was $8 to $9 billion,” said Mayank Rastogi, partner, private equity and transaction advisory services, at consulting firm Ernst & Young (E&Y).
“The activity in the mid-market space and the new money capital raise have been impacted by lack of capital investments for expansion and general slowdown in demand in a number of sectors. Deals are being more driven by need for liquidity of existing investors and leverage considerations,” he adds.
Along with difficulties in raising fresh capital, PE funds also continue to struggle with profitable exits which have been limited by the volatile equity markets and the inability of companies to meet their growth targets against the backdrop of a weak economy.
“There were a large number of funds raised during 2006-07 which had to be invested /deployed during the next three to four years. However, given the economic downturn in 2008, the investing cycle period got extended by another two to three years. The PE fund-raising climate has indeed been moderated in the past two years driven by the global macro-economic scenario, challenges in exits with good returns and the overall deceleration of the India's growth momentum,” said Raja Lahiri, partner, transaction advisory services, Grant Thornton.
The need for larger funds has also reduced the attraction of mid-size funds. “PE funds are looking at slightly different investment models including listed assets, management buyouts (giving them control), mezzanine-type structures and potential for larger fund raise. These have led to the need for larger PE investments,” Lahiri said.
Interestingly, not all funds are strugglingand at least three of them launched earlier this year have seen some success in drawing in investors. This includes IDFC Alternatives which has raised $644 million reaching the first close of its $1 billion targeted. Piramal group's real estate fund, Indiareit, raised $50 million for its $163 million fund based on the data provided by VCCEdge.
“Funds with a successful track record in exits and continued support from original investors has made fund-raising for a few firms easier than others,” Rastogi of E&Y said.