There is a subtle change in the limited partners (LPs) landscape for private equity (PE) in India. LPs are institutional investors which invest in PE funds, also called general partners in the segment.
In 2006-07, when many PE funds in India raised money, development finance institutions (DFIs) like CDC Group, the International Finance Corporation (IFC), DEG and FMO were the main investors backing these. While some of these continue to back PE funds in India, pension funds, led by Canadians funds, have emerged as the main LPs in India.
These include Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ), Ontario, or the Dutch pension funds, which have the ability to cut big cheques and invest for the long run. DFIs like CDC, IFC, DEG and FMO have gone slow, as their investments in India yielded only low single-digit return, confirmed two investment managers at these LPs.
CDC Group, investment arm of the UK government, earned zero return from India between 2004 and 2009, as against 20 per cent-plus net returns from China and 14-16 per cent from Southeast Asia, CDC Asia head Anubha Shrivastava had disclosed in 2012. Things have not changed much, despite a flurry of exits in the past few years.
Another LP recently told Business Standard recovered less than a fourth of the money it had invested. Its portfolio in India had generated only low single-digit return, less than the eight per cent threshold. Only two funds from that vintage (2006-2008) made a carry (posted returns more than threshold) and few more could do so.
Then, why are pension funds bullish on India? ‘Pensions work on an allocation basis. They ask, “have we invested in India’? Tick. ‘Have we invested in private equity in India’? Tick,” says a senior executive with an LP. Beside, pensions write cheques of $100 million or more, making it easier to raise a $1-billion fund than a $200-million one.
Commercial fund of funds — fund managers which raise money but instead of investing in companies, invest in funds — have also gone slow on India. These include Asia Alternatives, Axiom Asia, Eagle’s View, Macquarie and Flag Capital, which bought Squadron Capital.
PE funds from the 2006-08 vintage have underperformed as they invested at high valuations (before the global meltdown).