US-based Stanwich Advisors raised $17 billion for 40 funds from leading institutional investors across the world since 1996. Currently, the boutique investment bank that provides advisory and fundraising services to private equity firms helps a few Indian PE fund managers (general partners) raise funds from global markets. Its managing partner, Charles Daugherty speaks to Reghu Balakrishnan about the fundraising scenario in India. Excerpts:
Despite a good track record, why are Indian PE veterans still struggling for fundraising?
The fundraising market for Indian GPs (general partners) is clearly more difficult today than it was in 2007 and '08. For, we have more GPs competing for less capital. The private equity market is very crowded in India. A lot of fund managers are raising first-time funds that are managed by teams which have little to no shared work experience and/or have limited realised track records. In addition, private equity in India has faced significant competition from the public markets. The high valuations of private companies, a perceived lack of control and/or ability to create value by GPs and a lack of exits have led many investors to question whether the higher fees commanded by PE funds are justified.
What are the views of LPs (limited partners, or investors) towards the Indian market?
While LPs continue to view the investment opportunity in India as attractive, the private equity market is still relatively young. There has been a limited number of portfolio company exits and, therefore, proven track records. A lot of private equity funds were able to raise capital without ever having proven that they could consistently source high quality deals at attractive valuations and return capital to their investors. As a result, LPs are being much more selective today and will generally invest only with teams that have investment experience that reflects the complete investment cycle.
Do global LPs still prefer India among the emerging markets?
The interest from global investors in Indian funds has not kept pace recently, with the interest in China-focused funds. While the proportion of capital allocated to Indian funds has increased slightly from eight per cent in 2007 to nine per cent in 2011, the capital allocated to China-focused funds has increased from seven per cent in 2007 to 40 per cent in 2011. In addition, India-focused private equity funds must also compete with other emerging markets in Asia such as Indonesia, as well as other regions such as Latin America and Turkey.
What are the fundraising options if the meltdown in Europe and the US continue?
The majority of capital allocated to Indian PE funds continues to come from Asian funds-of-funds and traditional investors in the US and Europe. We have seen increasing interest in India from LPs in Japan and the Middle East.
However, Middle Eastern LPs, represented primarily by HNIs, family offices and sovereign wealth funds, have significantly decreased their investments to PE funds following the financial crisis.
What could be the fundraising scenario in 2012?
The resulting trend has been a "flight to quality". It is reflected by the fact that, on the one hand, a number of GPs have been forced to lower their fund targets or put fundraising on hold completely, while on the other, funds raised by experienced managers with a proven history of exiting investments have been oversubscribed. The expectation is, therefore, that it will be increasingly difficult for first- and second-time funds with limited realisations to raise capital, especially if the team has not worked together before or has little to no prior investing experience.