INSIDE India Overview-

Strengths & Weaknesses

Expectations and Way
Evaluation Criteria Forward

MARCH 2019

LIMITED
PARTNERS
REPORT
WWW.VCCEDGE.COM
INDIA
OVERVIEW:

MARKET
SENTIMENT
The Insights Research Programme carried out
by VCCEdge affirms that 80% of the Limited
Partners ( LPs) are inclined to make Private
Equity (PE) Investments.

KEY INFLUENCING FACTORS:

90%
F UT UR E G R OWT H
P R OS P E C T S

60%
P OT E NT I A L
R E T UR NS

30%
ACCESS TO
S P E C I F I C S E C T OR S

20%
P OR T F OL I O
DI V E R S I F I C A T I ON

10%
P OR T F OL I O
S Y NE R G I E S

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 THE NAYSAYERS

Weak exit environment and much higher risk/return profile in comparison to

other PE markets like China and US  have been responsible for one fifth of
the LPs to stop or limit their investments in India.

KEY INFLUENCING FACTORS:

80%
WE A K E X I T
MA R K E T

50%
P OT E NT I A L
R E T UR NS

30%
L I MI T E D NUMB E R OF
E S T A B L I S HE D GP S

30%
R E G UL A T OR Y T A X
C OMP L I A NC E I S S UE S

20% P OL I T I C A L R I S K

10%
L A C K OF DA T A ON
P E DE A L S

10%
MA NA G E ME NT OF
F UNDS B Y G P S

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 THE BELIEVERS

An increase in entrepreneurship in India, along with improvement in

the quality of startups have attributed to the LPs being quite bullish on
the Indian market. This positive trend is expected to continue primarily
because of the following main influencing factors:

World’s 2nd Largest Startup Ecosystem:

India is expected to witness an YoY growth of 10-12%, on the backbone
of Government of India’s (GOI) efforts to build a conducive ecosystem,
driving sustainable growth and generating large scale employment
opportunities.

Strong Demographics:
Provides a stable platform for the country enabling high growth rates
and rapidly expanding consumer markets.

Stressed Assets:
Evolution of Government policies related to Insolvency and Bankruptcy
Code have resulted in an increase in opportunities in Stressed Assets.

Favourable Economy:
With fiscal/trade deficit under control, lower inflation rates and overall
macro stability during the last few years ( due to constructive structural
changes by the GOI ) has resulted in providing a favourable economy
conducive to LP investments.

DEPENDENCIES :  THE SENTIMENT OF THE MARKET WILL BE GREATLY

INFLUENCED BY THE UPCOMING GENERAL ELECTIONS. THE RESULTS OF THE
VCCEDGE RESEARCH PROGRAM CLEARLY INDICATE THAT A GOVERNMENT
NOT SUPPORTIVE OF THE INVESTMENT ECOSYSTEM COMES TO POWER, IT
COULD CREATE A CHALLENGING SITUATION FUELLED BY A VOLATILE STOCK
MARKET.

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INVESTMENT
CRITERIA
TWO MAIN INFLUENCING FACTORS:
- GP’S ‘PREVIOUS FUNDS’ TRACK RECORD
- CO-INVESTMENT OPPORTUNITIES

MAIN FACTORS WHICH LIMITED PARTNERS CONSIDER BEFORE

MAKING INVESTMENTS

An insight into the fund's past track record helps the LPs in assessing
the capability of the GPs, along with their type of investments. It
identifies the performance drivers which will be consistent and stand
the test of time irrespective of the economic landscape or the risks
involved.

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A staggering 90% of the LPs are likely to invest in the
first fund of an Indian GP, irrespective of their past
record of First Fund investment.

MAIN FACTORS INFLUENCING THE LIMITED PARTNERS' DECISION

LPs ascertain the GPs’ abilities to deliver profitability by evaluating

the partner’s past successes in PE. This gives them confidence in the
GPs’ capabilities and also provides a good idea of the extent and
depth of their contact network.

According to the VCCEdge research, well-defined niche segments

greatly increase the probability of raising funds. Such funds
encourage LPs to co-invest and accelerate big-ticket deals.

Meanwhile, a small minority i.e. 10% of LPs would not like to invest in
Indian GP’s first fund due to weak exit environment, low returns ,
information asymmetry and currency volatility.

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ROADBLOCKS
Investments in India come with a fair set of challenges. The main
areas of concern, as cited by survey participants, which pull back
investment decisions in India are :

Exit overhang / weak exit environment | currency volatility | high

valuations | lack of transparency in communications between LPs
and GPs.
MAIN FACTORS AFFECTING INVESTMENT DECISIONS NEGATIVELY:

The above factors result in LPs incurring losses while GPs make
profits. Also the primary expectation of LPs is to get their returns in
dollar value and not in rupee terms.

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THE RISE OF
CO-INVESTMENTS

An emerging and common trend in the LP fraternity is co-investments.

As per the LPs market research conducted by VCCEdge, reduction in
management fee and carried interest, access to better and more varied deal
flow and increase in returns are the main criteria which have made co-
investments an attractive proposition for LPs. These are the key driving factors
for them while investing in any fund.

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WHAT MAKES CO-INVESTMENTS
ATTRACTIVE TO LIMITED PARTNERS?

FLEXIBILITY : Co-investments offer the flexibility of a

customised investment strategy. LPs can channelize their
capital more effectively by diverting funds to deals in a
specific region, industry or manager that they wish to
target. This enables them to take advantage of short-term
trends and tailwinds as well as match their investment
pacing to its cash flow needs. 

BETTER DEALS : Co-investments provide LPs access to

good deals with strong GPs, drives down fees and exercise
more control over underlying investments. 

BANG FOR THE BUCK: LPs are required to pay a fee to GPs
and while co-investing they benefit by paying a lower fee
to GPs. Further, in a scenario where the GPs are not able to
present any lucrative investment opportunities, the LPs
money parked with them remains idle, and hence doesn’t
yield returns. Therefore, LPs prefer to park an optimum
amount of funds with GPs and look forward to co-investing
with them.. 

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WHAT MAKES CO-INVESTMENTS
ATTRACTIVE TO LIMITED PARTNERS?
THE QUID PRO QUO :

LPs want a bigger playing field and invest in big ticket deals. On the
other hand, most of the GPs’ fund sizes are not large enough to
accommodate such deals. By co-investing, LPs get an opportunity
to invest in these big-ticket deals along with GPs. Hence there is a
quid pro quo, wherein while the LPs pay less fee for the co-
investments and have better control over the deal, the GPs stand to
benefit because with a large deal they get capital backing it along
with greater returns on their investments. This also encourages
them to partner with high quality funds. Hence a win-win situation
is created for both players.

TRENDS OVER
LAST FIVE YEARS
The data from
VCCEdge reflects
that though the
number of deals
reduced in 2017
and 2018, the
investment
amount has been
the highest during
these two years.

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THE MILESTONE CORPORATION DAILY REPORT

Expectations of
LPs from GPs for REALITY
a Congruous CHECK
Relationship

PE investment is a long term fiduciary business and the

biggest factor that the LPs feel that would help in
strengthening their relationship with the GPs is transparent
communication. The results of the survey clearly indicate
that maximum problems occur due to communication
breakdown by the GPs and their inability to convey clearly
and frequently. LPs expect to not only be made aware of the
success of the portfolio but also kept abreast of the red
flags and the steps taken to control such situations.

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THE MILESTONE CORPORATION DAILY REPORT

Important factors in evaluating Fund

Managers (GPs) REALITY
CHECK

Track record of investments through to exit, quality of

network to source, manage and support target companies,
active management and reporting of Environmental, Social
and Governance (ESG) risks are the top factors which LPs
consider while evaluating fund managers. Other secondary
factors which they consider are operational expertise in
target sectors and the GPs' commitment to the fund. LPs
are not really concerned about participation by known LPs
or by Indian LPs.

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 VCCEDGE
SUMMARY
The primary concern that has been
raised by LPs is the lack of transparency
by the GPs in keeping them in the loop
of important milestones and being
consistent with the information flow.
VCCEdge strongly believe that this
information gap can be addressed by
the LPs being more active and showing
a greater understanding of the
investment philosophy of the GPs. The
LPs should take responsibility of
supervision of their portfolios by periodic
check-ins rather than just participating
at annual board meetings.
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This would help in fostering a better
working relationship with the GPs who
would then have multiple
opportunities to convey their
investment strategies to the LPs. On
the other hand, the GPs should exhibit
extreme caution while raising funds
from LPs especially for the first time.
They should do a complete
background study on the investment
practises of each LP - where they
invest, how much they invest among
others and based on this factual data,
approach the LPs.
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 AUTHORS:

Shalil Gupta
Managing Partner-Research

Sahaj Kumar
Senior Research Manager

Ruby Dobriyal
Assistant Research Manager

For media enquiries, reach out to us

at mediaqueries@vccircle.com

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owned by the global diversified media,
news, education and information services
company - News Corp.VCCEdge offers
information on private equity/venture capital
transactions, mergers and acquisitions,
including deal terms, structures, deal amounts
and valuations. It also contains entity MOSAIC MEDIA VENTURES PVT. LTD.

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