PE players banking on sponsor commitments

At a time when raising funds is a concern for private equity (PE) players globally, sponsor commitments are increasingly gaining relevance among funds as a committed source of capital.

Experts said that in many cases, it has rescued the funds which were unable to achieve closures due to inadequate commitments.

The trend has become especially prominent in the last few months when limited partners (LPs) tightened the flow of capital to private equity funds.

Sponsor commitment or anchor investment is the amount of capital committed by the sponsors of a fund. The anchor investment is made at the initial stage of fund-raising to start the process and provide a sense of confidence to LPs.

Sponsor commitment has become much more relevant with a recent ruling by the Securities and Exchange Board of India which made it mandatory for foreign venture capital investors (FVCIs) to obtain a firm commitment from their investors for contribution of at least $1 million (about Rs 5 crore) for registration with the market regulator.

Here, sponsors or anchors could act as the much needed source of capital for getting registered with Sebi.

For example, Lazard pumped in Rs 125 crore in Lazard India Growth Fund which it raised recently.

It is a sector-agnostic fund which will focus on mid-sized firms. Similarly, the Aditya Birla group has invested $100 million (around 470 crore) in its $250 million (around Rs 1,200 crore) private equity fund. Religare, which recently announced its private equity initiative with Milestone has pumped in Rs 60 crore in Religare Milestone India Build Out fund I.

Vikram Utamsingh, Head of Private equity group at KPMG said, “New funds without a track record have been facing problems in fund raising. Getting a sponsor adds to the credibility of the fund. Sponsors generally commit 10-20 per cent to the fund and it becomes easier when the PE fund manager goes looking for a $5-10 million cheque.”

He further added, “This is especially important for India-dedicated funds as a lot of PE funds are chasing India as a theme right now.”

The Tata group which recently forayed into private equity through one of its arms, Tata Capital, has infused an undisclosed sum into its $350 million (around Rs 1,645 crore) fund which is currently in the process of fund-raising.

TVS Shriram’s growth fund received Rs 160 crore in funding from TVS and Shriram board of directors.