India GPs must back up value-add claims with returns - AVCJ Forum

"The word ‘proprietary' is useful only if it's going to drive certain investment outcomes. If you give me a satisfactory fund level return and all the deals are proprietary or all the deals are non-proprietary, that's fine," said Sunil Mishra, a partner with Adams Street Partners. "Everybody says they have the best management team and the best company and it is proprietary, it is unique, but in reality that is rare."

Much the same applies to operational value-add. Vikram Raju, an executive director with Morgan Stanley Alternative Investment Partners, noted that many operational approaches are "pro forma," expressed across a few slides in a presentation. "Half the time when we speak to entrepreneurs they say the GP doesn't know the business better than they do, they are the ones running it," he added.

To some LPs, the true test of a private equity firm's operational capabilities is reflected in the portfolio companies that do not develop as planned. According to Alagappan Murugappan, a managing director with CDC group, the key question is whether efforts have been made to bring in the right people and expertise and engineer a turnaround, or if the GP has simply ignored the most challenging situations and focused on healthier companies in its portfolio.

A recurring theme among Indian PE firms on the fundraising trail is a desire to secure control investments and add value - to which end some GPs have narrowed their focus to just a handful of sectors. While encouraged by the direction of the industry's development, the concerns for LPs are twofold. First, is the investment scope wide enough to deliver sufficient deal flow? And second, in a competitive environment, can GPs add enough value to justify the entry price paid?

As ever, the Indian private equity community will be judged on exits, an area in which firms have traditionally struggled. However, Dominic Goh, a vice president at HarbourVest Partners, has seen improvement. "Firms are returning a significant amount of the original cost base from funds that are 6-7 years old," he said. "I would like to see that trend and discipline carry on."

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