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Nupur Garg faces a daunting task. As the head of the International Finance Corporation’s PE funds business in India, she leads a team that invests roughly $100 million every year in new private equity (PE) funds and also tracks the $700 million IFC has invested in 34 funds in India since 2006. IFC had backed many first-time fund managers between 2006 and 2010, seeding two-thirds of the funds in the small-to-mid-market (less than $250 million each). A lot of capital flowed in during 2007-08. The industry took off and at its peak, there were over 200 fund managers. The problem is that most of these funds have under-performed: they have returned less than a fourth of this money, yielding single-digit returns for the portfolio. PE funds from 2006-07 have struggled to make exits as they invested at peak valuations before the 2008 meltdown and the rupee depreciated from Rs 37 to a dollar to Rs 67 to a dollar. The period between 2000 and 2006 was considered the golden vintage for private equity in India. IFC actively engaged in India since 2005. “All LPs have made mistakes,” concedes Garg. They backed many first-time fund managers — investment bankers, CFOs — who did not bring in enough private equity experience and should not have raised funds. ‘‘Indian PEs have not made money for anybody. Only two funds from that vintage made a carry (made a profit after beating the hurdle rate of 8 per cent) and another two or three funds could get there,” said another fund manager with a PE fund, who did not want to be identified. Some of the funds IFC had invested in closed with lower than target fund size — sub-scale funds generally find it difficult to attract and retain the right talent. There are seven to eight such funds in IFC’s portfolio. ‘‘Only a couple of them are challenged, who have not been able to keep their teams together,” says Garg. Some are struggling with their performance, but have held onto their teams and are working on exits, says Garg. IFC invests directly in firms as well as in private equity funds. It has invested roughly a tenth of its $7 billion in India in PE funds.
And despite its mixed experience, it continues to invest in new funds as it feels it has a role to play. “IFC has the ability to be contra-cyclical. This is a challenging time for Indian private equity. There is a strong contraction in fundraising,” says Garg. India-focused PE funds had raised $7.7 billion in 2007. In 2016, they raised $3.2 billion, including $1.8 billion raised by early-stage funds.The remaining $1.4 billion was spread across real estate funds, distressed asset funds, public markets and growth private equity funds. Growth private equity funds have raised less than $1 billion, says Garg. While India has failed to deliver, markets like the US have delivered double-digit returns for PE investors. ‘‘When we on the ground are saying we are confident, it sends a strong signal. We believe there is a gap in the supply of equity capital in India, which offers opportunity for PE funds to meet the needs of the mid-market companies,” says Garg. ‘‘We still believe in this industry and back fund managers who will deliver and contribute to sustainability,” says Garg. Of course, it has become more choosy — since 2010, it has backed fund managers who have delivered, invested in slightly larger funds, and moved away from sector funds. ‘‘Global investors will not give a third and fourth chance. It's time we get it right,” warns Garg.