India fundraising: Survival of the fittest

Spinning out of a parent fund is a daunting prospect even at the best of times. Taking on the process at a time when many LPs in the US and Europe are adjusting to severe domestic economic challenges is enough to make the hardiest of fundraisers wince.

This is the reality facing Manish Kejriwal, former head of Temasek India, who departed the sovereign wealth fund in September to launch an independent investment vehicle, and Sunish Sharma, former managing director of General Atlantic, who is expected to join him. And it holds true for Rajesh Khanna, former head of Indian operations at Warburg Pincus, Ranjeet Nabha, former managing director and CEO of WL Ross in India, and Subba Rao Telidevara, formerly a partner at Actis.

These professionals boast strong deal-sourcing networks and years of experience. Their relationships with LPs were strong enough to weather the trials of a spinout and, given India's growth potential and rising-star status in the global economy, marketing a domestic fund would surely open more doors.

But 2011 has seen a marked change in the investment landscape. Prospects that seemed so bright several months ago may be muddied come 2012.

"The public markets have let investors down and it's really tough to make a good exit right now. I think that there's been a lot of love lost in India because of that," says one India-based GP, noting that competition, prices and a lack of exit opportunities have all contributed to a change in perception for investors.

Spinouts have become such a regular occurrence in India's private equity industry that some observers estimate there are north of 200 funds on the ground. This activity has bottlenecked returns and created significant investment overhang. It may come back to haunt several of these funds as they seek capital in what is viewed as the worst fundraising environment since the global financial crisis.

If an established GP is unable to attract more than $200 million next year, as some predict, what hope is there for a first-time fund without a proven track record?

"I think they will find it very difficult to be successful," Vikram Utamsingh, executive director and head of private equity at KPMG India. "I don't think we'll see GP mergers - Indian businesses are too individually driven. Managers enjoy making all the decisions, deciding where to invest and the direction of a company. We will certainly start to see a period of consolidation, but it will come as funds start to disappear."

Good days turned bad days

India-based GPs who spoke to AVCJ contest that the current fundraising scene heading into 2012 hasn't been this difficult since the early 2000s.

Subbu Subramaniam, who founded his independent fund MCap Fund Managers in 2010 after spinning out of Baring Private Equity Partners India, lays the situation out: After 2001, fundraising in India was bleak following the bursting of the dot-com bubble - funds were available but LPs were cautious with their capital. One vintage later, in 2004 and 2005, overseas LPs were largely hands-off when it came to India, but the funds that worked to educate them were rewarded for their efforts. This laid the scene for some of the early successes in the market, such as ChrysCapital, Infrastructure Development Finance Corp. (IDFC) and Actis India.

Bolstered by returns seen in recent years, and encouraged by India's growth story, LPs became hyperactive in 2007, when times were good. "In 2006 and 2007, I could take a wheelbarrow through New York and get capital," one GP says. Subramaniam recalls, "We didn't have to leave the office to raise a $400 million fund - the effort was minimal and the reward phenomenal."

AVCJ Research shows that 44 funds raised $6.8 billion in 2007, rising to $9.5 billion across 61 vehicles in 2008. The peak has yet to be surpassed.

Fast-forward to 2012 and many funds that had little trouble attracting capital during the boom years are due to head back to market where far fewer dollars are available. Industry practitioners aver that the next 12 months will be even more difficult than 2009 and 2010 - in which LPs committed $4 billion and $2.5 billion, respectively - because fewer funds, 29 apiece, held final closings that year. Nearly double are expected to seek capital in 2012.

Funds that achieved a final close in 2011 have so far raised $3.5 billion. Sources tell AVCJ that the number will be less than $3 billion next year.

"The perception is that, with the global environment being so challenging, it's one thing if you're a team that has done well and has a real track record, but others will be highly challenged," says Mukul Gulati, managing director of Zephyr Peacock Management in Bangalore. "The so-called personalities will probably continue to do well because they have deep connections, but the smaller funds will consolidate, and I anticipate some will disappear."

Established players on the fundraising trail include ChrysCapital, which is said to be nearing the first close of its $500 million Fund VI, and Tata Capital, which is approaching final closes on its growth, opportunities and special situations vehicles. They make for imposing competition for smaller funds.

"Few of these new teams will be able to successfully raise money, the key reason being that they just don't have sufficient investing and exit experience," KPMG's Utamsingh says.

Celebrity cachet

Success, it appears, largely depends on how significant a name sits atop some of these new teams. How celebrated must a dealmaker be to qualify as too big to fail?

Few come bigger than Renuka Ramnath, who spent eight years as CEO of ICICI Venture before stepping down in 2009. Ramnath launched Multiples Alternative Asset Management later that year. In April of 2010, the firm announced a first close of $250 million for its debut fund, and Ramnath confirmed last month that the full target of $450 million had been reached. LPs include the Canada Pension Plan Investment Board (CPPIB), CDC Group, Andhra Bank and India Overseas Bank.

Aside from being a prominent figure in India's investment landscape for more than a decade, Ramneth is said to have taken a calculated approach to fundraising. First, she announced her fund early, in 2009, which enabled her to gain "tremendous traction in the domestic market" with LPs who knew her, says Subramaniam. Approximately $150 million of the fund's corpus is said to have come from local investors.

With capital in the kitty, Ramneth was then able appeal herself to the overseas market, where LPs drew confidence from the fact that so many top domestic investors had backed the fund.

"There seems to be one big, successful fundraise each year by a spinout. This year, it was Renuka, and last year was CX Partners [launched by former CVC International India head Ajay Relan]. Next year is unforeseen," Subramaniam concludes.

Spinout success stories have been clear, but the failures, for the most part, have not materialized. However, sources say that a consolidation phase will begin in 2012, and while sporadic spinouts will likely occur, the number will most certainly taper. Aside from the difficult fundraising environment, there aren't many more feasible spinouts left.

"The chickens are now coming home to roost and GPs will be measured in performance," says Mukund Rajan, managing partner of the Tata Opportunities Fund. "A lot of the smaller funds, which were able to raise money in 2006 and 2007 but perhaps were not able to show the performance LPs expected, would be the first candidates for consolidation."

Although KPMG's Utamsingh sees attrition as more likely than mergers, one Indian investor, who manages more than $1.6 billion across funds, say that his capital fund has been approached by several executives from spinouts looking to sell out.

"The most senior guys at some of these funds have approached us asking to recruit themselves and their whole team because they aren't seeing traction on second or third funds, and more than one shop asked if we would be interested in buying out their entire franchise," the source says. "Some names have been in the media but we're mostly seeing private discussions. I think the potential offers will go up in the coming year as more find it difficult to meet fundraising targets."

One example of this is former Goldman Sachs executive and head of India for Candover Harsha Raghavan, who announced the establishment of Steer Partners in December 2009. At the time, Raghavan said he would focus on the "new India, playing to the demographic and lifestyles that are prevalent in new India." Yet, by July 2011, following domestic reports that Steer Capital had a difficult time raising its first fund, news surfaced that Raghavan become the new head of Fairfax Financial Holdings, helping the Canada-based company to invest in India.

An LP state of mind

Track record, team stability and an eye for unique bargains are repeatedly been cited as the key to fundraising and thus survival. This is no different from recent years, but many spinoffs that lack longevity in the market have depended on ploys to spin their situations in their favor. It's unlikely this will be enough in 2012.

Sources cite a typical formula for spinoffs in India. First, the professional in question approaches LPs with whom he has longstanding relationships and secures them as anchor investors for the fund. Then the capital is used to buy a minority stake in a growth-sector company, perhaps at a slight premium - dubbed the "low-hanging fruit" of the asset world - and this becomes collateral when approaching more investors.

The problem is that many expect these easy targets to disappear given increased competition, and what was already expensive will become more so. One GP says that he typically faces competition from four or five other funds when entering into auctions and, as a result, has become more creative with the types of targets his fund approaches.

An overall dearth in assets to invest and more cautious LPs may prompt fund managers to wait the situation out. This onus is not exclusively on GPs, as LPs may also be adopting this mindset.

"LPs currently evaluating teams have adopted a wait-and-watch approach and are likely to be closer to decision-making in the first two quarters of 2012," says Archana Hingorani, CEO and executive director of IL&FS Investment Managers. "Given these timelines, it appears that any major consolidation driven by some fundraising distress will start toward the end of 2012 and get active through 2013."

Hingorani adds that early opportunities will come from LPs looking to re-up on their investments if their fund managers have exhibited results. "If the track record meets LP criteria, there is little reason for LPs to reinvent the wheel in this uncertain market," she says.

Zephyr Peacock's Gulati avers that certain categories of LP will be more susceptible to Indian investing than others. He notes that, in order of importance, Americans retirement plans and endowments will first look to shift money East, as will North American family offices. Next come European fiduciaries and family offices, which will be slower to get into the market, but will still find India's story compelling.

Following these investors is the "new breed of Asian family offices and fund of funds," which will disperse money between China, North and South Asia. Middle Eastern families follow this category. Last on the list are domestic Indian institutions and Indian families. These players are destined to become more significant players in private equity than in the past, but will remain a smaller source of capital than overseas LPs.

For all the challenges expected in 2012, India remains an attractive prospect in difficult economic times. Despite lackluster returns from funds in recent years, strong GDP growth and attractive demographics still underpin the investment narrative. India is one of only three emerging Asian economies to offer genuine single-market scale. Of the other two, China and Indonesia, investors may already have exposure to the former and be unconvinced by the latter's ability to absorb capital.

India fund managers are also becoming savvier, which appeals to Western LPs who have traditionally found talent a difficult find, but there are still too many of them.

"I do think that investors see this as a time to invest in the market, and I think that there are a lot of LPs who didn't commit last year but will be looking to commit next year," says one GP. "But I think funds in 2012 will have to be clever with their approaches, raising money and creating a sustainable plan. It'll be a time when the men will be separated from the boys."

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• Topics
• South Asia
• Fundraising
• People
• India
• Fundraising
• Spin outs
• Ranuka Ramnath
• Multiples Alternative Asset Management
• Archana Hingorani
• IL&FS Investment Managers
• Tata Capital
• Vikram Utamsingh
• KPMG
• Subbu Subramaniam
• MCap Fund Managers
• Mukul Gulati
• Zephyr Peacock Management
• Mukund Rajan