PE avoiding ‘blind pool’ investments, demand more control over their money   

November 16, 2010

Gone are the days when investors would put money in a ‘blind pool’. They are now demanding a say in the choice of investment sectors as well as returns, and a shorter time frame

A key issue faced by private equity firms (called General Partners, also referred to as GP) is the demand for transparency from investors (known as Limited Partners, or also LP), as well as sector specific investments and a shortened time frame within which they can exit their investments.

Speaking on the sidelines of the Indian Private Investors Conference (IPIC) in Mumbai last week, Anubha Shrivastava, managing director, Asia for CDC Group plc said, "The world has changed after the financial crisis. The LPs today hesitate to make blind pool investments. They want industry specific investment." The entire money coming into a PE fund is pooled and invested at the discretion of the fund managers, usually in proportion to the contribution of investors. But now investors want to be involved in the process of investment.

The desire to exercise greater control over investment is a result of high expectations and the promise from private equity in 2007, which unfortunately got short-circuited by the financial crisis. Many high net-worth individuals (HNIs) are stuck with their earlier investments.

Also, HNIs who have made money from being entrepreneurs in control of finances do not want to lose control of their investments. One of the concerns LPs have is the lack of knowledge and the status of their investment over the years. This could change, as GPs may allow LPs an 'observer' status in the investment committee, involve them in specific deals, give regular information through an annual conference, and so on.

The discomfort with the long-term nature of investment is also due to the lack of liquidity. This has given rise to the need for a shortened time frame for exiting the investment. The ways for GP exits are IPOs, secondary sale to another PE fund or to strategic investors. Often, GPs are not able to make a planned exit due to numerous reasons. Then they are compelled to go for another round of fund-raising, sometimes diluting the returns of original investors. That is another reason investors need to have a sense of control over how their investments are faring.

Private equity represents investment in equity capital of companies that are not publicly traded on the stock exchange.  This asset class took off in India in 2004 and is now in a fresh phase of growth, post the global financial crisis.

According to Jairaj Purandare, leader financial services, PricewaterhouseCoopers (PwC) India, "Private Equity investment in India between 2004 and 2009 was as much as $40 billion. About $70 billion is expected to flow in between 2010 and 2013.

India is the second most-favored destination for foreign direct investment (FDI) after China. India is also the fifth largest consumer economy. We have low dependency on exports and a high share of services in GDP. There is strong rural income and consumption. The domestic savings rate is high, as well as investments. There is a liberalising regulatory regime with 100% FDI barring certain sectors. FII investments are allowed in government securities and corporate bonds. These are all favorable trends for the private equity industry." — Moneylife Digital Team