Indian firms must prove their worth to LPs – AVCJ Forum

Recent government reforms and the stability of the overall economy are strong marks in India's favor. While LPs acknowledge these factors are likely in theory to result in strong growth in the near future, they emphasize that these developments alone cannot make the case for investing in a particular GP on the ground.

"As private equity investors, especially at the fund level, we don't invest in macro. Macro tells us what not to do, but macro rarely tells you what to do," said Sunil Mishra, a partner at Adams Street Partners. "For example, we still invest in the US, even though it's not the fastest-growing market and hasn't been for a long time, because it creates a lot of liquidity returns."

This dynamic creates pressure on Indian GPs to deliver above and beyond what would be considered a reasonable return in a developed market. LPs understand that managers might consider these expectations unfair, but they stress that they are responsible to their own stakeholders, who see emerging markets as inherently risky. For example, Peter Martisek, director at Blackrock Private Equity Partners, says his investors worry that currency instability will wipe out any gains their investments make.

"I sympathize with GPs here; foreign exchange is beyond their control. But ultimately my clients don't care about Indian rupee depreciation, they care about dollar return," said Martisek. "They ask me why we invest in India when you can get the same type of return in the US or somewhere else. So there needs to be a premium in terms of performance."

In order to win favor with an LP, a manager must be able to show what makes his vehicle worth its investment. Ryan Wagner, investment director for Asia at CDC Group, said too many Indian GPs still operate under generalist business models, seeking deals around the same size in a similar range of sectors. The managers give little information that will help differentiate them.

Managers must also be willing to engage with LPs as colleagues in the market, rather than as spigots for cash. This means getting to know the LPs' needs and explain their business model and investment strategy on a regular basis, not just when they are in the market for a new fund.

"Some GPs will say, ‘We are not raising capital now, but let's talk two years from now when we are in the market,'" said Jacob Chiu, managing director at HQ Capital. "But if you want to raise capital from an LP, you need to constantly communicate with them so that they know what you are doing, they know your appetite, they know your approach to investment. By the time you raise your fund, LPs should already know a lot of information so that you'll be a part of their existing relationships."

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• Topics
• South Asia
• LPs
• Fundraising
• India
• BlackRock
• CDC Group
• HQ Capital
• Adams Street Partners
• AVCJ Events