January 2010

Large business families in the US, Europe and West Asia are increasing their allocations to private equity funds focused on India, reposing their faith on the India story at a time when traditional investors in such funds are refraining from committing additional money. Some of the families that have invested, or have shown an interest, in Indian companies are the Oppenheimer’s of the US, the Swarovski’s of Austria, Germany’s Grillo Group and some business families in West Asia such as the Al Ghurair Group. Increased flow from business families has come as a boon to private equity funds. The global meltdown that shaved off almost a fifth of the stock values has discouraged the traditional investors such as pension funds, large institutions and university endowment funds from increasing allocations. Most institutional funds have their investments marked to the market. Mark-to-market or fair-value accounting refers to the accounting practice that records the price or value of a security, portfolio or account to reflect its current market value rather than its book value. Wealthy business families have been keen to invest in Indian companies, said fund managers and advisers to such families. Family offices, or private companies that manage investments and trusts for business families, see limited avenues to invest, said a fund manager, requesting anonymity. Their decision may also have been influenced by the fact that most family offices are advised by Indians, he added. However, data on the increase in allocations are not available as business families are highly secretive about their wealth and investment plans. The family offices are typically advised by high-profile Indian professionals as they understand the local environment better. Guru Ramakrishnan, a former Morgan Stanley senior executive and ex-CEO of former Citigroup hedge fund, Old Lane, is one such adviser. Mr Ramakrishnan is well known in investment circles. He, along with Vikram Pandit, current Citibank CEO, had walked out of Morgan Stanley to start Old Lane. After closing down Old Lane, he has now formed a $300-million hedge fund, Meru Capital. Another adviser to foreign investors is Vinod Sethi, the former Morgan Stanley adviser, who is involved in drawing wealthy overseas investors to alternate energy projects in India. He is also one of the co-promoters of Mount Everest, which was bought by Tata Tea. Former Deloitte managing partner Dilip Choksi, now actively involved in promoting family-office business in India, is also advising foreign clients to invest in India-focused funds. Investment by institutional investors in private equity funds has come down dramatically, post the global meltdown. The $203-billion California Public Employees’ Retirement System, considered a bellwether investor in most PE funds, recently said its private-equity portfolio was off 6%, while its real estate portfolio fell 47%. “Although, it’s not clear whether allocations between the two classes of investors have changed, it is being seen that more private equity firms are going to family offices to seek investments. Indian companies provide a perfect opportunity for such funds to increase their returns given the growth trends in our economy,” said Vikram Uttam Singh, head of private equity at professional advisory firm KPMG. India’s economy, which was quick to recover from the economic downturn induced by the global recession, is expected to expand at the pre-slowdown rates of over 9% in the coming fiscal years. The country’s growth is also not limited to a few sectors. Car sales from all domestic companies have seen record figures last month and consumer durables is expected to grow 20% this year. “Most of the interest in India is in sectors such as infrastructure and consumer-related industries, where the consumption is directly linked to customers,” said Avinash Gupta, head of Deloitte’s financial advisory. Most private equity firms don’t reveal the names of their investors as it could harm allocation prospects. Apart from CalPERS, other regular India investors include the Fidelity family fund and Michael Dell, the American multi-millionaire businessman who has invested in Indian technology firms. ICICI Venture, one of India’s largest PE firms, which is planning a $500-million fund, has said it intends to raise $200 million from overseas investors. Preqin, a private equity research firm said that adverse market conditions globally contributed to the fall in the number of exits for private equity firms, an important factor that affects profitability of existing investments and also led to the slowdown in fund raising. The total value for new private equity-backed deals in 2009 totalled $77 billion, which is a 61% fall from 2008, the firm said. The increase in allocations from family funds could also be because of the fact that such funds are focused in their approach. “The family funds, with largely equity-focused assets, have done very well over the past year with greater upside in non-PE investments. So, they are rebalancing towards PE. The pension and endowment funds are run on a widely-diversified asset allocation-basis,” said Rafiq Dossani, a director with the Centre for South Asia at Stanford University. The Stanford University Endowment fund regularly invests in private equity. Prequin said in 2009, private equity fund raising had its worst fund-raising year since 2004, with only $246 billion being raised by 482 funds worldwide. This is 61% down on the $636 billion raised in 2008.