| Limited partners cautious about committing funds | |
| BS Reporter / Mumbai June 25, 2009, 0:22 IST | |
Negotiating stricter terms with PEs before making investments.
Despite a sharp rise in stock markets globally, the situation has not changed significantly for private equity (PE) players.
Limited partners (LPs), or investors in PE funds, are still cautious about their allocations and are negotiating stricter terms with PE players.
“LPs are concerned about business risk, management performance and corporate governance,” said Mark Silgardo, senior managing partner, IL&FS Investment Managers, on the sidelines of a PE summit hosted by Indian Venture Capital Journal (IVCJ).
Srinivas Baratam, managing director, Lazard India Private Equity, said, “LPs are reluctant to accept any increase in the fund size and are negotiating over audit fees and other costs. They are also asking for an active advisory board.”
Lazard recently raised a Rs 500-crore, India-focussed fund, targeting mid-size firms in the country. No wonder, PE funds are focussing more on investor relationship, transparency and communication. They are meeting LPs more often and facilitating interactions with portfolio companies.
Draw-downs, the process through which PEs get access to additional funds from LPs periodically, had become extremely difficult during the past year. Now, fresh draw-downs are being worked out, but on a longer-term basis. “We are allowing longer and pre-planned draw-downs,” added Silgardo.
With the global turmoil hitting economies and markets the world over, all major LPs have suffered capital erosion. This has led to serious concerns over PE funds’ continued participation with their portfolio companies in terms of fresh investments.
According to a global survey on asset management fees by research firm Mercer, alternative investment strategies have the highest fees for each dollar of investor capital allocated, including investment in PE fund-of-funds. The survey found that an investor might end up paying 40 per cent of returns in fees in case of PE fund-of-funds.
Another major concern for LPs is the exit route. “PE funds will have to reduce dependence on IPO exits as I don’t see it coming back in a big way. They will have to look for alternative means,” said Silgardo.
However, the good news is that with developed markets in deep recession, PE money could still find its way into emerging markets. “LPs are realising that there are a lot of opportunities in emerging markets such as India and China, mainly because these economies are still growing,” said Anand Sunderji, Guggenheim Capital Management Asia.
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