Gone are the days when Indian private equity was the sexiest thing in town. The 2005-2007 era seems like a distant memory today. I thought it would be timely to address this in my column, with all the negative Press surrounding us lately.
As per my research, there are at least 50 funds in the market (not counting the global funds with an India strategy). Almost half of these will be first-time funds. Needless to say, fundraising is expected to be challenging.
Sure, there have been notable successes in 2011, namely Westbridge Capital and Nalanda Capital, who seemed to have raised the capital with relative ease. But ironically, both funds adopt public market strategies.
In my frequent exchanges with Asian institutional LPs and fund of funds, the following observations about India have become exceedingly commonplace:
Valuations are too high.
Indian GPs have not delivered.
There is a lack of exits, while stories of impressive returns are rare.
Given the short history of Indian private equity, coupled with all the hype, the competition, the turnover and execution issues, Indian fund managers are suddenly faced with a lot of tough questions.
While GPs need to embark on some serious self-reflection, it’s also time for some introspection on behalf of us LPs.
As per VCCircle's article (Shrija Agrawal) dated September 27th, 2011: Some GPs who have raised monies in the past and not hitting the fundraising front soon, voiced their opinions regarding the LPs and said that the LPs were to be equally blamed if there’s so much capital now and that they backed anyone and everyone as they did not want to miss on India.
I do believe there is some truth to this. With the extreme buzz surrounding India, a large amount of capital was disproportionately allocated to a handful of high profile funds which ended up with too much capital to manage. Some of it also landed up with first-time funds, but a few of those over-promised and under-delivered and perhaps should have never been able to raise the money to begin with. Almost six years later, the jury is still out for many. Like in any emerging private equity market, there are investors who are disappointed. It’s all part of the process of investing in new geographies, coupled with excessive hype.
As LPs look for diversification, the Southeast Asia, and in particular Indonesia, has been gaining a lot of attention. Will this mean more allocation to the Southeast Asia and less for India? Indonesia kind of reminds me of India in 2005-2007 – it was sizzling hot and everybody wanted to be there. At this stage, there are not that many funds to choose from and many new ones are emerging. It will be interesting to see how things pan out.
As for India, comparing portfolio to portfolio indicates that there are definitely some highly promising teams in the market. Things look somewhat gloomy on the fundraising front and there will be players who get driven out or those who may not be able to raise capital. But this may actually be a good thing. Less competition and less hype are exactly what we have needed for so long. Those who are willing to stay close to the market and back the right teams may have the opportunity to reap rewards as the private equity ecosystem gradually (and hopefully) evolves and corrects itself. More exits, better returns and greater stability shall not go unnoticed.
