For the past few months, working weekends and endless cups of insipid airport coffee have been part of a gruelling schedule for some of India’s most seasoned private equity (PE) hands. These men and women have been on the road raising new funds. And, so far, the process has been slow and laborious. In Mumbai, the nerve centre of India’s PE sector, a few new funds are already in play.

Actis leads the pack with a fresh $2.9 billion pan-sector emerging markets fund, of which a reported $1 billion will come to India. Last week, the UK-headquartered investor also added a $750 million emerging markets infrastructure fund to its kitty. ICICI Venture has reportedly raised $200 million out of a targeted $500 million buyout fund. The fund corpus may be raised to $800 million. Kotak Private Equity is nearing the final close of a $600 million fund. The fund has been on the road since mid-2008.

Crunch Time

“Limited partners hold all the strings now. It is taking longer than usual to convince them to make fresh commitments,” says the CEO of a Mumbai-based firm that is currently raising a fund. Incidentally, limited partners have been competing with PE fund managers in clocking air miles. Since October last and even earlier, limited partners­—institutions that invest in private equity firms—have been criss-crossing Indian metros to check on the portfolios of PE funds in which they have parked money. The result is that most of these investors have now aligned with seasoned fund managers. “It will be tough, even going forward, for first-time fund managers to raise funds,” said Actis India head JM Trivedi when Outlook Business spoke to him a month ago.

It will be tough, even going forward, for first-time fund managers to raise funds.JM Trivedi,Partner. Actis

There are varying estimates on the quantum of PE money raised for India in calendar 2009. According to Thomson Financial, 13 funds have raised $2 billion so far, which compares quite favourably with the $3.5 billion raised by 25 funds in all of 2008. However, the numbers reported by Emerging Markets Private Equity Association (EMPEA) present a slightly different picture. India, says the association, raised $2.5 billion in the six months ended June, against $7.7 billion in all of 2008. 

Globally, PE fundraising, reports London-based research firm Preqin, has hit an all-time low. A total of $187 billion has been raised in the nine months ended September, against $478 billion in the same period last year, said a Preqin release dated October 1. Further, the $38 billion raised in the July-September quarter is the lowest since 2003, said the release.

However, there is a silver lining, most notably for the BRIC countries. According to the findings of a limited partner survey by EMPEA and Coller Capital in May, investors rated India as the second most attractive emerging market to invest in, after Brazil. 

That should be welcome news to the band of fund managers who are either already raising funds or planning to hit the road in the next few months. There are reports that infrastructure specialist IDFC Private Equity, which raised a $700 million fund last May, is looking to raise a new fund next year. CEO Luis Miranda could not be reached for comments.

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Low Tide

PE fundraising has been a slow starter in 2009. In India, even raising $500 mn proved to be a task.

Fund	PE firm	Amount raised
SCI Asia	IL&FS & StanChart	640**
Actis Emerging Mkts 3*	Actis	2,900
Actis I’structure Fund 2*	Actis	750
India Advantage Fund	ICICI Venture	200***
India Value Fund IV	India Value Fund	725
Carlyle Asia Growth IV*	Carlyle Group	1,040
CX Partners	CX Partners	220****

Note: All figures in $ million; *Global funds, India is one of the target markets; **Final target $800 million; *** Final target $500 million; ****Final target $600 million
Source: Companies

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Then, former ICICI Venture Managing Director Renuka Ramnath is said to be raising a $500 million generalist fund for her recently set-up firm Multiples Alternate Asset Management. New Delhi-based CX Partners, fronted by former Citi Venture Capital International honcho Ajay Relan, has already raised $220 million of a targeted $750 million fund. Mumbai-based IL&FS Investment Managers, which has been investing since 1989, is also on road to raise a $800 million pan-Asia infrastructure fund. The fund, dubbed SCI Asia, is being raised in collaboration with Standard Chartered Bank.

It is no coincidence that all the funds being raised are well below the $1 billion mark. In fact, most fund managers admit privately that even raising $500 million is a big task in the current environment.

Call For A Cut

The scale-down in fund sizes is also a reflection of some of the pertinent trends sweeping PE globally. Limited partners, scarred by diminishing or disappearing returns, have been pushing for a revision of the ‘2 and 20’ rule that currently determines compensation in the private equity industry. Fund managers are paid 2% of the fund corpus as management fees per year. In addition, they also take home 20% of the profits, called carried interest, earned at the time of exit. Limited partners want to bring down the management fee to 1% and prune the carried interest as well.

The standoff will not be easy to resolve. In the meantime, however, limited partners are holding back on fresh commitments to new funds as a defence strategy. “Several blockbuster funds were raised in the past few years just to take home that management fee. That era is now over,” says a senior executive at a UK-based institution that invests in PE firms, who was in Mumbai recently to attend an investors’ conference. PE fund managers will now have to get used to putting less to work for more. Luckily, seasoned fund managers like Actis’ Trivedi and IDFC Private Equity’s Miranda have been there and done that many times before.