India fundraising: Moment of truth

"When we launched the fund we thought we had done an awful job on timing," says Gopal Jain, co-founder and managing partner at Indian private equity firm Gaja Capital. "It was right after the rupee crash of last year and Modi wasn't on the radar. Now the outlook seems better. What is more important is the investment cycle is still in its early stages, so it is a good time to invest - the hordes have yet to arrive."

Gaja launched its second fund in the final quarter of 2013, a matter of weeks after concerns about the health of India's economy and potential easing of US stimulus measures sent foreign investors scurrying to the exit, and the currency tumbling.

One year on, public markets have rebounded in anticipation of Prime Minister Nahendra Modi rolling out promised and much-needed economic reforms. With a first close of $130 million under its belt, Gaja expects to reach or beat its $225 million target in the first half of 2015.

The GP now appears to have picked its timing well, coming to the market ahead of a string of other Indian PE firms, all of which want to capitalize on the upswing in investor sentiment. But are LPs - with their long-term perspective and, in many cases, still critical of local managers' past performance - buying into the story as keenly as their public markets brethren?

Sunil Mishra, Partner at Adams Street Partners, describes the current situation as macro momentum tempered by a micro drag effect. India's economy is showing signs of health, compared to the situation over the last five years and also relative to many other emerging markets. But once the LPs dig deeper into individual GPs, warning flags emerge: many managers' track records are still blighted by a lack of exits.

"There is a good market demand for the India story but on the micro level the story is somewhat less compelling in terms of progress of individual GPs," says Mishra. "We are not seeing a lot of actual fundraising yet but there is a lot of interest; let's see how much of this interest translates into actual dollars."

Several other LPs echo this view. Juan Delgado-Moreira, managing director at Hamilton Lane, observes that India will likely fall in line with the fundraising dynamic prevalent in most of Asia. Some funds will be raised quickly, others will take a long time and the rest will struggle along somewhere in the middle.

Hole in the market

Capital-raising for India-focused private equity and venture capital funds stands at just under $2.4 billion in 2014 to date, including final and incremental closes. This beats the full-year total for 2013, although over one third of the capital raised went into VC vehicles. Fundraising peaked at $9.4 billion in 2008 and has been on a general downward movement ever since.

This trend is inextricably linked to the demise of growth capital. In 2008, growth capital funds accounted for more than 50% of the total raised, or $4.9 billion. In each of the next three years, this category of manager raised no more than $2.2 billion. Since 2012, the annual total hasn't topped $520 million.

The performance of these managers has been central to LP dissatisfaction with Indian private equity. They specialized in minority investments with IPOs the natural exit route. Several of the higher profile managers are now either in or preparing to return to the market.

Everstone Capital, Gaja Capital, ICICI Venture, CX Partners, India Value Fund Advisors, Samara Capital, Jacob Ballas and Multiples Alternative Asset Management are collectively looking to raise in the region of $3 billion. Strategies vary - and in some cases have evolved significantly since the previous vintage - as do existing LP bases, but these managers are to a certain extent competing for slices of the same pie.

"For every Everstone that raises a fund, it creates some difficulty for funds that are essentially in the same space," one LP tells AVCJ. "As much as GPs like to talk about different market segments, they are all competing with one another. If an LP was investing in three funds last time it would probably only be 1-2 funds this time. People are cutting their allocations in terms of GP relationships in half."

A clear trend among the GPs coming back to market is moderation: few firms are seeking to raise larger funds than in the previous vintage. At least two managers have previously scaled back funds after the final close, responding to a slower-than-expected pace of deployment as well as an economic opportunity that has arguably failed to live up to the initial hype.

The majority of LPs that spoke to AVCJ said they were comfortable with generalist India funds of around $500 million; enter $750 million territory and the mood changes.

There have also been a few spin-outs from pan-regional PE players by investment professionals who want to pursue smaller deals than might be permitted under a regional fund remit. Of course, raising a first-time fund in India is no easy task, so it remains to be seen whether these spin-outs gain traction.

Those that do manage to raise money will face a markedly changed investment environment, and the pricing disciplines that comes from reduce competition may work in their favor. Between 2006 and 2008, local managers raised over 130 funds, 54 of which were growth capital vehicles. In the last three years fewer than 70 funds have been raised in India, 20 of them growth capital.

The handfuld of private equity firms estimated to be in existence post-2001 grew to around 200 by 2007. Now, though, it is esimated there are now no more than six firms that manage a fund larger than $500 million, and no more than ten firms that manage more than $500 million in assets.

"More capital going into India is good the country is capital-starved but it is important that it goes into the right hands," says Alagappan Murugappan, managing director at CDC Group.

"It remains to be seen whether this is a good vintage. The public markets have improved and that has a bearing on private market valuation expectations. We hope that GPs have learned from the past and will not succumb to the pressure of participating in auctions and paying ridiculous valuations just to get deals done."

Closer scrutiny

Inevitably, LPs are now more scrutinizing of GPs' strategies. Closer attention is paid to team stability - and whether firms have sufficiently broad compensation structures in order to retain staff - and the extent to which managers are building up investment platforms that are able to execute the strategies being marketed. This is particularly the case for GPs that are promising to deliver substantial operational improvement.

"LPs are paying a lot of attention to two things: exits and value add," says Hari Buggana, managing director at InvAscent, which closed its second healthcare fund earlier this year. "They want know how active the GP is in the business and now there are many due diligence services being built up around defining value add. LPs are having more conversations with portfolio company management to determine how active the investor was in that investment."

Buyouts are an emerging area of differentiation, but they are not the only one. Cross-border strategies are increasingly prevalent, whether it involves helping US companies build back office operations in India or supporting Indian companies that want to expand regionally. The likes of Westbridge Capital and Nalanda Capital have launched evergreen funds and primarily target PIPE deals.

There is also an element of sector specialization emerging beyond the traditional areas of early-stage technology and infrastructure. While InvAscent found the LP community had become far more selective than when it was last in the market in 2006-2007, Buggana adds that the previous clear preference for generalist managers has been replaced by an increased acceptance of specialists.

Jain also feels that Gaja's focus on education is taken more seriously, in part because the GP has shown the strategy is workable.

"At the beginning of the previous fund it was an ambition but now sector specialization can be claimed on the basis of a deeper body of work," he says. "We are India's leading investor in education and have made three more investments in the sector from the new fund. Up to 40% of the fund might be invested in education."

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• Topics
• Fundraising
• South Asia
• LPs
• GPs
• Fundraising
• India
• LPs
• GPs
• Gaja Capital Partners
• Adams Street Partners
• Hamilton Lane
• CDC Group