"Indian PE Is A Young Asset Class"

In an interview with BW's Mahesh Nayak, IFC's South Asia's Ayaan Adam talks about why fund raising still continues to be difficult in India (and emerging markets), upcoming trends in the PE industry and where and why IFC is likely to invest money 

Why are private equity players in India finding it difficult to raise money? Aren't limited partners (LPs) confident in investing in Indian markets?
Appetite for emerging markets private equity in general has been muted —although in 2011 it has shown a positive trend — with $26 billion raised, it is still lower than the peak of $40 billion in 2008.

Fund raising for Indian PE in 2011 hasn't recovered to the $8 billion levels of 2008 either. "A lot of liquidity constrained LPs had reduced allocations to emerging markets PE. Within that allocation they have also favoured some of the larger markets and this is, in some part, also driven by the level of exits.

IFC has run counter to this trend and as an LP has been happy to develop a deep PE investing program in India and South Asia focused on GPs who are small and/or new and focused on expansion capital largely in the SME sector. We have announced commitments to 7 strong funds in the past nine months and are looking to further develop our presence in the region in the coming year. Apart from the SME focus we have also made commitments to funds investing in the low income states and funds that address climate change issues.

What trend do you see in the coming year for the overall private equity industry in India?
Indian PE has evolved from a venture capital (VC) oriented market to a quasi-public model and latterly a more operationally focused environment. This shifts away from pure multiple expansion to a focus on earnings improvement is what we expect to see more of. India has a wealth of trained professionals who are functional experts. PE funds that combine this pool with the entrepreneurial energy of the Indian promoters are better able to foster earning growth and therefore control exit outcomes - irrespective of market volatility.

Though IFC acts both as an LP as well as a general partner (GP), what has been the expectation of IFC as a LP? What are your expectations from GP when you invest in India dedicated funds?
We look for three things. Firstly, does the fund have a team and investment strategy that is compelling and able to deliver strong returns? Our PE funds portfolio at the global level has a 10 year track record in excess of 20 percent at the net level.

Secondly, we look for development impact of these PE funds in terms of increased access to finance, jobs created, impact on low income states, impact on climate change, promotion of South-South linkages.

Thirdly, we try and ask what value does IFC bring as an LP? If having IFC as an anchor investor helps a GP mobilise more capital, improve governance standards and adopt Environmental and Social standards, then we feel there is a role for us to play in fostering such GPs in countries where we operate. Our investments are usually in first and second time funds and at the smaller end of the market.

Why are we seeing desperate exit(s) in India?
Indian PE — like a lot of emerging markets PE — is a young asset class. From a low base at the turn of the century, the size of the market (funds raised) grew very rapidly on the back of some very strong exits. The expectations based on that initial set of exits remains but the pool of capital is much bigger and the public market conditions are different. This pool of capital is, of course, not uniform and we see the ecosystem developing in a positive way with a greater number of full and partial exits from the small funds to the larger funds.

Which are the markets that IFC would bet its money? And why?
IFC is very active in lower income countries and in frontier markets. We see our role as a counter cyclical capital provider and our track record shows that we have generated top quartile returns globally precisely because of those attributes.