Private equity has been one of India’s fastest growing alternative asset classes, particularly with high net worth individuals, who have an increasing number of PE funds in their portfolios. Once an esoteric asset class, private equity is now real competition to public equity. But has private equity delivered on its high risk-high return mandate?
Relatively few private equity managers in India have an exit track record, and it is unlikely to be as watertight as the well-regulated track record of a public equity mutual fund. Global studies, such as one done by Preqin, on 4900 private equity funds (representing 65% of the AUM in private equity globally), shows that over the long term private equity has had limited success compared to public equity, and in the last year, private equity managers have underperformed public equity managers on the aggregate. This is especially likely to be true in Indian markets, where private equity is more “perfectly priced”, with everyone chasing the same handful of deals and promoters that don’t leave very much on the table. Moreover with private equity managers charging large carry and most public equity managers operating on a fixed fee model, private equity is likely to be behind net of fees, unless PE managers are truly delivering 4x or 5x returns on their entire portfolio.
Near perfect pricing, perhaps, is driving more and more private equity managers to include public equity as a significant part of their portfolio, and we may soon see private equity firms raising complete public market funds in India. Given the current environment, moreover, adequate liquidity and the ability to take advantage of volatility are critical, and public equity managers are in a better place to do that. Public equity managers can move swiftly in and out of securities in volatile markets, exploiting dislocations that private equity may not be able to. The combination of these factors – agility in volatile markets, regulatory transparency, and strong performance by public equity makes a strong case for public equity over private equity.
Interestingly, private equity sales have been very strong in the last year, more so than sales of public equity mutual funds, particularly where investments from HNIs are concerned. This is more a reflection of the distribution landscape rather than the investment merits of private equity – private equity is almost certainly one of the highest commission paying offerings, ahead of insurance and mutual funds. The long lock-ins allow private equity managers to pay large upfront commissions to distributors, making for great sales.
In the Indian context, if an investor looks at private equity, perhaps the best form is when an HNI takes a concentrated bet in an upcoming individual company (a GP rather than LP role). An influential HNI with a large stake in an early or mid-stage venture has the ability to shape a business as a GP, if he chooses a business that is the right fit.
(Radhika Gupta is a Founder Director with Forefront Capital Management, a SEBI registered portfolio manager, and India's first specialized quant manager. Prior to co-founding Forefront Capital Management, Radhika was a portfolio manager at AQR Capital Management, a twenty billion dollar asset management firm in Greenwich (Connecticut) where she built quantitative models to trade developed and emerging equities, currencies, and fixed income. Radhika graduated from the Wharton School (University of Pennsylvania.)