Wealth managers advise clients to invest in US-oriented offshore products
Fresh contribution by limited partners (LPs), including wealthy Indians and offshore investors, to local private equity and venture capital funds sank in the three months through June, as investors took a pause in a slowing economy.
LPs signed fewer cheques for PE funds during the second quarter of 2019, but commitment to VC funds rose to the highest level in six quarters. However, the huge difference in the quantum of money flowing into PE funds versus VC funds means that the total LP commitment slumped 90% to the lowest level in two years, a VCCircle analysis shows.
“The perception of a slowing economy is deterring clients from making long-dated, illiquid bets through PE/VC funds,” said Atul Singh, CEO at wealth management firm Validus, which was acquired by European asset manager LGT in July.
LPs, who are institutional investors or represent wealthy individuals and families, are the source of capital for PE and VC funds. They are typically long term investors and their capital is usually locked in for five to 10 years.
The steep drop comes after Indian PE and VC funds garnered record investment commitment from LPs in the first quarter of 2019, catapulting the dry powder—or investible money—to a new peak ahead of the general elections.
PE and VC funds registered with the Securities and Exchange Board of India (SEBI) reported Rs 40,268 crore ($5.8 billion) as fresh LP commitment in the January-March 2019 period, beating the previous peak by 16% posted in the third quarter last year, according to VCCircle estimates based on official data.
The dataset includes funds marked as Category I and II alternative investment funds registered with SEBI. These two categories represent venture capital, sector-agnostic as well as sector-focused PE firms, and private debt firms.
Meanwhile, capital deployment by PE and VC funds remains robust. Although the quantum almost halved from the record amount of nearly $2 billion invested in the first quarter of 2019, it was the fifth consecutive quarter where these India-registered funds poured in at least $1 billion.
The decline in the quantum of fresh commitment and a reasonable pace of investment pulled down the dry powder with PE-VC funds in the country.
It is not the first time that the total dry powder with Indian PE-VC funds has declined. However, at Rs 3,000 crore, it is the single-biggest drop ever since SEBI started tracking alternative investment funds registered in the country. Still, the dry powder at some $22 billion is huge.
According to Validus’ Singh, the government is taking steps to revive the economy, but demand uptick needs to be visible before risk appetite comes back for this category.
“At this point, the public markets look more attractive as structural reforms are causing a lot of volatility and presenting a good opportunity for picking up quality stocks at a good valuation. Therefore, we are seeing a shift in investors’ mind set as they divert allocations from private markets to public markets. To that extent, PE and VC fundraise has got impacted,” Singh said.
A separate VCCircle analysis showed that the dry powder with Category-III alternative investment funds rose 11.2% during the three months through June to Rs 13,847 crore ($1.9 billion) – its highest-ever mark – after dropping in the January-March quarter. The cash pile is up nearly 3% from the quarter ended June 2018. This data captured public market PE funds and firms following hedge fund strategies.
SEBI introduced its AIF regulations in 2012 to supervise the unregulated fund market, encourage capital formation and protect investors. Since then, more than 600 AIFs have registered with SEBI across all categories as of January-end 2019. Under the regulations, Category-I includes venture capital funds, infrastructure funds and social venture funds. Category-II comprises private equity funds and debt funds.
It captures only funds registered in India and does not factor in international domiciled funds. To that extent this does not reflect the entire alternative investment climate but outlines trends.