Wall St. Journal India Livement 2008

PE backers turn cautious, yet Indian fundsmay stay in favour

Limited partners, or funds backing private equity firms, ask more questions; scrutinize manager performance

Rana Rosen

Mumbai: Doug Coulter has a daily reminder that fund- raising for private equity (PE) funds will be a tough task this year. If he has any doubts, the Asia for Zurich¡¯s LGT Capital Partners AG has head of PE investments in AG, which has made write-downs to just look across town at lender UBS worth $37.4 billion (Rs1.5 trillion) in the wake of the US subprime crisis. ¡°People are asking more questions. People are more sceptical,¡± says Coulter about a specialist class of investors¡ªlimited partners (LPs)¡ª who back PE funds. But LGT, which recently
poached an Indian venture capitalist from Silicon Valley to help invest money in funds here, is going forward with its expansion plans for Asia PE against the winds in a sobered global investment climate.

LGT Capital Partners¡¯ Dough Coulter (left) and Varun Sood of Capvent India Advisors Pvt. Ltd Like LGT, most LPs are changing their behaviour in some way in the aftermath of the subprime crisis and its ripple effect into India¡¯s equity markets. While LGT, among others, will likely pump more capital into India¡¯s
PE funds, some LPs say they will reduce exposure, or turn away from emerging markets such as India, especially given the volatility. Others see India as more
attractive with its potentially decreasing valuations, and returns still higher than mature markets. Despite both the divergent groups, LPs and their advisers say the net change to India¡¯s overall ability to raise funds and make PE investment will likely be minimal.

Indeed, recent funds raised seem to suggest little has changed from the past. British fund 3i Group Plc. closed a $1.2 billion infrastructure fund on Wednesday that was 20% larger than expected. Yes Bank Ltd, in partnership with Global Environment Fund, secured $20 million from the Asian Development Bank for its $200 million clean energy fund on Thursday. Last month, Helion Venture Partners closed its $210 million, which was 1.5 times its first fund. Pak-Seng Lai, managing director and head of Asia for alternative asset investment advisers Auda International Lp., says, ¡°Our strategy will not be affected by short-term market fluctuations.¡± Those in the PE business who have a longer track record may even turn away investors. LPs that want to stay in India, but want to go with the safest bet are expected to turn to those funds. ¡°The bad ones go away, and the good ones get bigger and better,¡± says Rahim Penangwala, who leads LGT¡¯s PE investments in India.

But, most experts agree, there will be more pressure for many PE fund managers. There will be more emphasis on track record of such managers and funding for early as well as late rounds of PE. Alex Bangash, MD of US-based LP advisers Rumson Consulting Group Llc. says, ¡°There will be a hurdle for the third and subsequent fund.¡± Fund-raising cycles are expected to become longer and tougher, particularly for those looking to raise their first fund.

¡°There is also some apprehension about the ability of Indian GPs (general partners or PE fund managers) to put the capital they have already raised to work,¡± says David Pierce, chief executive officer of Hong-Kong based Squadron Capital Management Ltd, which is a so-called ¡®fund of funds¡¯, or a fund that has backing from other PE and venture capital funds. ¡°In the current environment, some investors will wait to see more realizations before making additional

Still, advisers say that some LPs will look to increase their allocation to PE funds because that¡¯s the long-term trend and such investments have become more attractive in light of a global equities meltdown. The California Public Employees¡¯ Retirement System (CalPERS), the US¡¯ largest pension fund and often a trendsetter among LPs in the world¡¯s biggest economy, has already increased its overall allocation to PE from 6% to 10% for the next three years. Clark McKinley, spokesperson for CalPERS, says, ¡°Private equity is less susceptible than public stocks to market swings.¡±

Most LPs, according to advisers, are still working on such decisions, which could take up to six months. And even if allocations to PE funds go up, the absolute investment may still be lower than before because the size of the full portfolio has gone down after the equities meltdown. LPs are also strategy. Some will begin to diversify away from re-examining their PE global buyout funds that rely heavily on debt, which has become more expensive after the subprime crisis. This will, however, bode well for India, given that the PE market does straight equity deals for more than 95% of its activity.

Another factor helping Indian PE funds is that several LPs are also allocating more into emerging markets and Asia¡ªboth areas that will have India as a focus. Anubha Shrivastava, portfolio director of South and South-East Asia at Britian¡¯s CDC Group Plc., says, ¡°I can tell you that emerging economies are looking infinitely more interesting than developed markets.¡± CalPERS says it will likely increase its investment in non-US sectors, including emerging markets, from one-third to almost 50% of its overall investment in so-called alternative products,
which totals $23.548 billion. Its allocation to PE in emerging markets was $400 million in 2007. LGT, which has commitments of $10 billion to PE funds, plans to increase investment in Asia from 10% to 15% in three-five years.

There will be increased specialization among investors, predicts Varun Sood, managing partner of fund-of-funds Capvent India Advisors Pvt. Ltd. Some LPs, especially those managing assets of wealthy business families, are expected to scale back their plans for PE investing in India. ¡°There were a lot of momentum players (earlier)...when momentum disappears, they wouldn¡¯t be so interested any more,¡± according to Sood.

AP contributed to this story.
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