Investors check if fund managers' claims add up

It was a routine check by the West Asia-based LP (limited partner or investor), when they were approached by an Indian private equity fund manager to raise his new fund. But, when the outcome of the check (due diligence, in the jargon) on him came out, the LP was shocked. The degree certificate, supposedly from one of America’s Ivy League business schools, flashed to the LP was a fake one.

LPs include pension funds, endowments, foundations, big institutional investors and high net worth individuals. As hundreds of Indian GPs (General Partners of fund managers) throng global markets for PE fundraising, most LPs have made it mandatory for a thorough reputational check, especially for first-time GPs.

Says Reshmi Khurana, the India head of due diligence company Kroll, “Contrary to the earlier routine check to be done at the end of the LP’s fund commitment to a GP, nowadays all due diligence firms are asked to conduct a reputational diligence on the fund manager as the first step of the process.”

According to a recent Bain & Company study, about 120 PE funds seeking to raise approximately $34 billion are on the road in India since 2011. However, even seasoned managers are finding it tough to raise offshore funds. Rajesh Khanna, former India head of Warburg Pincus, failed to raise a fund for his own Arka Capital and wound up the effort last year. Harsha Raghavan, former India head of Candover India, also shut his shop, Steer Capital, opened with former WNS chief Neeraj Bharghava.

“For experienced GPs, we can check the returns given or the investments done in the past. But in India, many of the fund managers who try their luck are doing it for first time. We will then have to depend on information which can be sourced from GPs’ former colleagues, former employers and portfolio companies where GPs served on board,” said Khurana.

According to Preqin, about 680 funds through the world raised $270 billion in capital in 2011. Of the total, only $12 billion came with the mandate to invest in India, down from $18 billion in 2010, showing LPs have become more selective about Indian GPs.

According to Dinesh Anand, partner and co-head, forensic services, KPMG India, there was a 40 per cent increase in demand for a reputational check on GPs in India in the past year.

He said, “As the Indian economy booms, a lot of global investors are looking for entry into Indian PE space. They demand a thorough diligence on GPs, beginning from the college days.” According to him, in most cases, the checks are done with the GPs aware.

According to sector experts, incidents of GPs being bribed by promoters also force LPs to go thoroughly into their track record. However, investigators say it is difficult to unearth such incidents.

Subbu Subramaniam, managing partner at MCap Fund Advisors, who raised about $60 million in 2011, said: “Similarly to GPs which are doing diligence on promoters, it’s fair for LPs to do diligence on the fund managers. It’s a natural extension of the process they are following with their entrepreneurs.” Already, the risks are higher for first-time funds to raise offshore funds, he added.