• Global LPs scarred by past losses in India are tentatively circling the market again
• Billion-dollar funds, new standards of institutionalisation to define the next wave
• The emergence of a domestic LP base suggests conditions are ripe for GP formation

The prevailing sentiment in India’s healthy but arguably stagnant private equity industry is that it needs a shot in the arm. Whether that takes the form of regulation to free up domestic cash flows, outsized returns that de-risk the market as a single-country allocation decision, or both, even a stretch scenario of bankability may suffice to sway wary investors.

The industry as it stands today was shaped by just such an event. ChrysCapital’s third fund, a 2004-vintage vehicle of USD 258m that generated a 4x return in US dollar terms, is credited with validating India as a destination for global capital and prompting the establishment of several local managers.

Many entrants chased businesses delivering lower return on capital, pursuing US-style strategies without local nuance. Meanwhile, the success story that enticed them remained an anomaly, not the only winner of its vintage but the only fund-level homerun.

“We need to see a couple of funds that generate outsized returns in US dollar terms. If those returns can compete at global scale, that’s when you’ll have a watershed moment. We saw this happen in 2007 with ChrysCapital’s third fund. It created tremendous momentum for the market in general,” said Praneet Garg a managing director at fund-of-funds Asia Alternatives.

“The reason there was so much believability in China was because there were four or five funds with outstanding performance compared to global portfolios. That allowed for momentum in international capital.”

The ensuing history of overestimation and disappointment has not been forgotten. India fundraising reached USD 12.4bn in 2008, a level it would not see again until 2020, according to AVCJ Research. Overall, the funds mobilised during this period performed poorly, with total proceeds from PE exits languishing below USD 10bn a year, including venture, until 2015.

Even as India has emerged, alongside Japan, as one of Asia’s few positive narratives amidst the current global slowdown, there is a sense that the market is punching below its weight. Fundraising came to USD 3.2bn, excluding venture, in 2023, on par with USD 3.4bn in 2022 and USD 3bn in 2021.

The resilient but flat showing is largely attributed to global investors accessing India via the perceived relative safety of regional funds and global funds, as well as a general tendency to scale back Asia exposure in favour of more attractive opportunities at home.

Minimum cheque size requirements for global LPs and lingering unease around currency risk are contributing factors. At the same time, the gradual maturation of the economy has largely shifted development finance institution allocations from the middle market to venture.

Getting bigger

The stasis has continued in 2024, with about USD 1.3bn raised for Indian PE ex-venture in the first half. This excludes a bumper USD 1.7bn haul for Kedaara Capital’s fourth fund, the largest Indian private equity vehicle ever raised by an independent manager.

Still, Kedaara’s coup should not be discounted as a beacon of rising global LP appetite for India, especially as it appears to be part of a mini wave; ChrysCapital became the first manager to eclipse the billion-dollar mark last year with its ninth flagship fund, which closed on USD 1.4bn.

“There are global firms out there talking about putting USD 5bn or USD 10bn into India in the next three years. People are excited that larger buyouts and opportunities are going to be available,” Kunal Shroff, managing partner at ChrysCapital said, estimating the market for PE deployments to be in a range of USD 30bn to USD 40bn a year.

“If you take a typical fund with 15 investments, USD 100m a deal means it’s a USD 1.5bn fund if you deploy the entire fund in these investments. It’s very easy to make a case for several billion-dollar funds in India. Today you only have two. Could you have five? Absolutely.”

ChrysCapital’s ability to deploy quickly is presented as evidence that the required depth in the deal market is there. Fund IX is expected to be fully invested within three years. Fund X is in the planning stages and a target is yet to be set, although it will almost certainly be scaled up.

Shroff said the corpus would be determined by the scope of the investment opportunity rather than LP demand, prudently leaning toward a smaller-than-possible but quickly deployable amount. He described Fund IX as having been raised with this philosophy as well.

Srini Sriniwasan, a managing director of Kotak Alternate Asset Managers (KAAM), observes that funds are getting larger because global LPs are seeing performance and therefore willing to write bigger cheques. He also points to a recent relaxation of regulatory take-private restrictions, which could encourage ambitions to raise larger, more buyout-oriented funds.

KAAM raised USD 1.5bn last year for its second strategic situations fund, a mezzanine offering. The key to attracting global LPs is no great secret – consistency in approach, team cohesion, the ability to originate and execute – but it remains a learning process for much of the industry, according to Sriniwasan, who is also vice chair of the Indian Venture & Alternate Capital Association (IVCA).

“Many large global LPs don’t have the time to do detailed diligence in India, so it’s important to be able to stand the scrutiny of gatekeepers and advisors that give those investors comfort,” he said.

“The standards of diligence they apply are very different from what domestic LPs currently apply. If you based the fund entirely on domestic LPs, you need to bring up your act to achieve meaningful scale.”

Too much capital?

The most controversial aspect of the expansion of the homegrown Indian GP universe is whether it should happen at all.

In this view, local GPs set up shop and burn out quickly. Small managers can raise domestic capital readily, but it’s not sticky enough to commit to multiple vintages. Many are backed by corporates or big families that don’t appreciate PE as a long-term game and therefore prone to snuffing programmes prematurely. The consolidation is ongoing.

Meanwhile, GPs with newly China-light Asia allocations are trickling in. Sovereign entities from Singapore and Canada are increasing their direct exposure as well, sometimes opening offices. PE as a percentage of GDP is on par with Australia and twice the penetration of Japan.

“I don’t think the Indian landscape can absorb that many players over USD 1bn in size without them cannibalizing each other. There’s not enough deal flow to justify that,” said Ricardo Felix, head of Asia Pacific at placement agent Asante Capital, which has been active in India for at least 10 years and now sticks to franchises at Fund IV and higher.

“If one of those funds blows it out of the park and the assets are not just in the big hubs but across the country, exiting to bigger GPs and IPOing, maybe it can absorb more. But PE is already close to 1% of GDP – that’s super high for an emerging market, higher than some developed markets.”

Nevertheless, many of the LPs that got burned in the early to mid-2010s are coming back for more. One such fund-of-funds said it still factors a 3% year-on-year rupee depreciation into its potential investment modelling, but it sees opportunity in a more operational mindset.

The global investor acknowledges that questions have to be answered for the failures of India’s first wave, but it is willing to forgive a weak Fund I when Fund II and Fund III are delivering returns.

“The largest funds have done very well and grown in size, but there are plenty of interesting funds below them as well. You have some buyout funds in the USD 500m-USD 700m size, and some of their deals can actually be quite large because they can bring big co-investors as well. Their returns have been good,” said a Hong Kong-based director at the firm.

“The GPs today are the ones that survived and emerged stronger. They understand they made mistakes and learnt from that. Most of the GPs today know what they’re strong in or not strong in. So, they tend to go after things that they know, and there’s a lot more focus on value creation.”

Institutionalised upstarts

The common thread of the survivors is increasing institutionalisation, including shared ownership of the GP, alignment of interests in firm economics, and meaningful GP commitments. To some extent, these virtues have been passed down through spinouts of larger institutions, even at the smaller end of town.

Amicus Capital Partners, for example, was founded in 2015 by former executives of Carlyle and True North. It closed its debut fund on USD 90m in 2017 and recently completed fundraising for its sophomore offering on target with about USD 200m in commitments.

“One of the things that people don’t have an appreciation for is doing a great deal is very different to running a private equity fund as a business,” said Mahesh Parasuraman, a co-founder of Amicus who previously served as a managing director for the Asia growth capital team at Carlyle.

“Now you have managers that have gone through the cycles and understand the pains of raising capital, the importance of returning capital on a periodic basis, how to staff a team. That learning curve is there for eight to 12 managers.”

The most recent activity in this theme includes the spinout of Trident Growth Partners by Atul Gupta, an investor with a 15-year track record at Premji Invest. Trident is currently targeting about USD 250m for its debut fund.

There is also One Planet Partners, a climate-focused firm set up by former investors of Tata Capital, including Bobby Pauly, who helped establish Tata Capital in 2007.

One Planet is currently in stealth mode and looking to warehouse its first few deals to strengthen its fundraising pitch down the track. It plans to target the same class of global investors that backed Tata Capital. Demonstration of institutionalisation, including operational skills, is a high priority.

“LPs are demanding you have the ability to control outcomes, which is forcing managers to do more control. PE investors in India have to think of themselves more as owners of businesses than providers of capital,” Pauly said.

“When I own a business, I should have all the skillsets to run it myself and the wherewithal to attract talent and get the right governance in place. You also need a strong compliance and legal team in the fund. That’s a very different skillset from just picking the right entrepreneur and hoping they do a great job.”

Local money

Most first-timers will not have a comparable career background and will therefore depend more on domestic capital. This puts the outlook for homegrown GP formation at odds with a fundamental structural impediment facing the overall industry – regulatory restrictions preventing domestic pensions, insurance companies, and banks from investing in private equity.

“How can a country the size of India depend solely on foreign flows? Our banking system doesn’t. Our insurance sector, pensions, and public markets don’t. Our private markets will remain subscale if we don’t connect them to domestic savings,” said Gopal Jain, co-founder of Gaja Capital.

“If we create these pathways from domestic savings to alternatives, domestic GPs can play catch up with foreign GPs and there will be greater balance in the system. These pathways can be created through flick-of-the-pen reforms.”

Jain added that government-backed fund-of-funds Self Reliant India Fund (SRI) and Small Industries Development Bank of India (SIDBI) have played an important role in creating many domestic GPs over the past 10 years. However, more investors of this type would be required to de-risk PE entries for LPs unfamiliar with the asset class.

There no clear sightlines on the launch of any additional fund-of-funds for this purpose, even as access to private equity is gradually opened up to insurance and banks. National Investment & Infrastructure Fund (NIIF), one of India’s largest sovereign investors, has had a fund-of-funds programme since 2019, but it is focused on more experienced managers than encouraging GP formation.

More significant traction in mobilising domestic capital – most of which is ultimately represented by private wealth – has been on the tax front. The most recent example came with the union budget announced earlier this month, which effectively abolished an angel tax and put private investments on tax parity with public investments.

“The discrimination is now over. We can now pitch to domestic investors and say that part of your money should be in unlisted or you should take on more unlisted, and there’s no tax disadvantage anymore,” said P.R. Srinivasan, a managing partner at Xponentia Capital. “I have three insurance companies in Fund II, and now I can tell them to invest more in Fund III.”

Xponentia is a case-study in the argument to build out India’s local LP base. Srinivasan attempted to raise the firm’s first fund in 2012-2013 under the name Exponentia, targeting exclusively foreign investors because he believed local LPs were too small and disincentivised by the prevailing tax regime. That fund failed.

In 2018, following a reduction of the capital gains tax on unlisted stocks from 20% to 10%, Srinivasan returned to the market, slightly rebranding as Xponentia and pitching exclusively to domestic LPs. He raised INR 4bn (USD 50m). Fund II closed on INR 10bn with the same playbook last year. Both featured SIDBI.

There is a sense, however, that domestic funding has its limits, and those limits make for fairly small funds without foreign capital. Srinivasan said Xponentia’s third fund would definitely need to go abroad. And the further one goes up the middle-market spectrum in terms of fund size, the less hope there is in a meaningful domestic support base, at least in the immediate term.

“Domestic capital will help on the venture side, but it’s not going to change the PE landscape for homegrown managers,” Asia Alternatives’ Garg said. “Even if domestic LPs give 10 funds each USD 100m, it wouldn’t move the needle because it wouldn’t attract global capital. In fact, it might be seen as more of a risk.”

Optimistic Everstone

The most compelling counterpoint here is that even the most international of India-focused managers sees domestic capital as playing a critical role in its future.

Everstone Capital was formed in 2006 in Singapore with a mandate centred on India but featuring a Singapore-based investment committee, a Singapore-based fundraising function, and significant Southeast Asia deployments.

The core investment thesis is to back India as a supplier to the world and as a supplier to itself, especially in tech services and healthcare. Target businesses have their main operations in India but earn US-dollar revenues, thus hedging rupee depreciation concerns. LP commitments have been effectively 100% non-Indian to date, but that is set to reverse.

“Domestic investors understand the local dynamics a lot better and are willing to take more risk. It’s a journey, but in 10 years’ time, I wouldn’t be surprised if we were 30%-40% domestic capital,” said Avnish Mehra, vice chairman and co-head of private equity at the firm.

Everstone will begin to raise its first significant quantities of Indian capital with its fifth fund, which is expected to go to market this year with a view to raising between USD 800m and USD 1bn. Mehra said the plan is for 5%-10% of that to come from India.

The firm secured USD 750m for Fund III in 2016, while Fund IV was cut short after a USD 300m first close in 2021 due to market jitters around the Ukraine war and a general pullback from emerging markets. As a result, Fund IV has been framed as a bridge vehicle for Fund III, even sharing some portfolio companies. Fund V is expected to meet with significantly better sentiment.

“Everyone right now is more interested in Indian than they were. It would be rare to find somebody saying, ‘I’m less interested in India than five years back,’” said Puncham Mukim, head of India at Everstone, adding that this firm has delivered a gross IRR of 30% for the past five years.

“We’ve had first-time investors and co-investors in several positions at the fund level and portfolio company level. These are guys who have not done direct investing in India or investing in India before.”