One of the chief advantages of having lots of money is that you have access to opportunities to grow that money at a rate that lesser mortals can only dream of. Private equity funds are among such instruments. They pool money from wealthy individuals and entities (big global funds typically won’t take less than $50 million) and invest in aggressive and unconventional ways. Some of their bets fail but the others make spectacular returns. When things go well, investors end up with a rate of return that makes them very, very happy.

It’s a bare knuckled, high-adrenaline business at heart, involving buying companies and making tough decisions to turn them around or take them apart to unlock the value in their parts. Talented fund managers are coveted, and can make multi-million dollar commissions in the deals they engineer. It also involves heart-stopping levels of risk-taking and highstakes decision-making.

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This particular slice of rarefied high finance is having quite the moment in India. The year 2017 was its biggest yet, and 2018 is already looking like it’s going to be bigger. The industry is also witnessing a stream of exits by highprofile fund managers, who are setting up their own funds. More than 100 funds are looking to raise $15 billion in India right now. And while global giants such as Blackstone, Carlyle, KKR and TPG have thus far dominated the business, Indian business families are getting serious about PE investing, and that could change the game in significant ways.

In 2017, funds operating in India set new records, with investments in excess of $26 billion and exits from investments at $16 billion. The exits were aided by a booming IPO market. More than $5 billion worth of Indiafocused funds were raised globally, with a similar amount raised from within the country. The first half of 2018 saw a slight slowing of the investment run rate but the exits topped all records, with the aid of the Flipkart-Walmart deal, to touch $26 billion. Even without Flipkart, 2018 has seen $11 billion worth of PE exits already. But there were other kinds of exits happening as a sideshow to this furious deal making. A string of high-profile fund managers started quitting marquee companies to set up shop on their own.

In this industry, the team stability is often key to success, and the top teams of many PE funds have often worked together for a decade, seeing investments through from deal to exit. The churn in the industry is in some ways the fruit of its own success, giving senior professionals the confidence to go it along.

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Mathew Cyriac, co-head of global PE fund Blackstone in India, quit early in 2017 and later bought out some Blackstone assets at a discount. Shankar Narayanan, former managing director in India at global PE fund Carlyle, quit in early 2018 and announced last week the first fund raise of $100 million for his own PE venture Sanaka Capital. Devinjit Singh, another Carlyle veteran, who quit in June 2018, has already joined hands with two other industry veterans —Ajay Relan and P Srinivasan — and has applied for a licence with SEBI for a PE fund named Xponentia. Many more senior pros have left and some like Manoj Dengla of Carlyle, Harsha Raghavan of Fairbridge, Niten Malhan of Warburg Pincus, Nikhil Raghavan of Bain and Ashish Khandelia of KKR have already declared their intention to set up new funds.

By one estimate, more than 100 funds, old and new, are trying to raise an estimated $15 billion India-centric PE funds right now. The people churn in the industry has much to do with flux — some that they seek, and others that have spurred them to make a move.

Many are feeling inspired by the China model and how the country has a bunch of independent home-grown PE funds and home-grown investors. A senior pro who quit recently says India should have at least 15-30 independent PE entrepreneurs attracting global and local capital flows.

“I do not see the flood of new funds stopping any time soon,” says Sanjeev Krishan, partner and leader for private equity and deals at PwC. Arpan Sheth, who leads the PE practice in India at Bain & Company, adds that funds will soon be competing for deals and even the Indian players will be writing out large cheques for companies, previously a domain for the global PE giants. “There are now more $1billion PE funds and there will be even more in the future,” Sheth adds.

Restless Pros
In June this year, Mayank Tiwari had quit PE firm KKR as director and country head for its operations arm, KKR Capstone. Tiwari’s role was to make sure the investee companies remain in good health. He is moving to a job in West Asia, to manage investments for a group of HNIs. As he prepares for the transition, Tiwari is enjoying being a more hands-on father for his 4-month-old child. Tiwari is a trained tabla and drums players, sings for a band, and loves singing “Phoolon ka taron ka” for his daughter Norah, named after Norah Jones. In many ways, bringing up a child can be an analogy for what Tiwari does — seeing businesses turn around and grow to maturity. He identifies the lack of buyout deals in India, where a PE firm gets majority control, as a stumbling block. Along with that, Tiwari feels Indian PE industry is at the right place for an entrepreneurial breakout. “PE as an asset class is coming of age in India. In the last 10-12 years, it has seen at least two cycles. It is ripe for entrepreneurship, and senior investors now have enough experience, insights and battle scars,” Tiwari says.

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ET Magazine spoke to at least half a dozen senior pros who have quit and are trying to launch their own funds. Most of them are not willing to be quoted or divulge much of their plans right now. KKR refused to comment.

Shankar Narayanan said having run funds for more than 25 years and seeing Carlyle grow from strength to strength in the last decade gave him the confidence to start his own fund now. “I felt the time had come to leverage my investing experience to create value for my investors by investing in existing profitable companies, which are growing by 30-40% per annum and are lead by entrepreneurs with drive, hunger and integrity. As these companies transitioned from being small and medium companies, I could act as a catalyst in transforming them.”

While Tiwari felt hamstrung by the lack of buyouts in his operational role, many in the fund manager’s role seem to be comfortable. In fact, there is a desire to be free from rules that bind the managers working for foreign players, especially when money is available. A fund manager who started off in 2017 said on conditions of anonymity: “Fund managers get frustrated because the straitjacket formula of the US is applied in India. Buyout deals are ahead of their time in India. A cookie cutter approach (having strict formats within which a deal must fit) for a global fund also restricts the number of deals a firm can do in India.”

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Thankfully, there is no lack of funds. Globally, at the end of 2017, the PE industry had around $1 trillion of surplus to invest across the world and a lot of that is headed towards India. There are also different sovereign funds and pension funds that are trying to set up operations in India, looking for managers. Global funds seek out fund managers with global pedigree — much like Narayanan or Singh or Cyriac.

India’s PE industry has gone through a similar cycle before. In 2007-2011, a clutch of professionals started their own funds. Renuka Ramnath-led Multiples, Sameer Sainled Everstone and Manish Kejriwal-led Kedaraa Capital have done well, but many others fell by the way side. After the 2008 financial crash, fund raising was a tough ask. This time around, the larger crop of startup PE funds are likely to see more money. One of the founders of the earlier crop of PE entrepreneurs said that the first 18 months is typically a difficult period, which makes or breaks the fund. Once the money is raised, the fun begins.

New Money, New Trends
Apart from the entrepreneurs, larger groups and financial players like the Tatas, Aditya Birla Group, IDFC, IL&FS and ICICI Bank also started their own funds in that period. Brokerage firm Motilal Oswal also bet on PE, choosing a 30-year-old chartered accountant from Kolkata to lead its push. Vishal Tulsyan remembers those days well. His was clearly the wrong profile, wrong pedigree (no MBA from the US). Neither MOSL nor Tulsyan himself had any PE experience, and he was too young.

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Tulsyan recalls how he spent travelling between Dubai and Oman for the first 100 days, meeting investor after investor, and living out of a “bag and a suitcase”. It was hard to convince people, but Tulsyan had the tailwind of 2007 behind him and raised $115 million for the small- and mid-cap-focused fund, mostly from wealthy individuals in West Asia. Today, while Tulsyan is raising his third fund of Rs 1,500 crore ($200 million), it is a vastly different story. “This was easier. We have 70% of the investors from India itself and we have taken a horizon of 10+2 years, unlike our first fund, which was 7+2 years.”

MOSL PE, of course, has a track record today, having invested in a host of small and mid-sized companies, dealing with packaged foods to incense sticks, and having taken some of them through their IPOs. The 13 companies that got investments from the first fund had a combined valuation of Rs 3,200 crore at the time when MOSL PE invested in them, and are currently valued at Rs 70,000 crore. The fund has provided gross 27% returns.

There is now growing awareness among Indian business families about new ways of investing their money. While the larger ones like Aditya Birla or Piramal end up starting their own PE initiatives, there are others who manage their funds through family offices and these have started putting their faith in private equity funds. The Indian regulatory regime has also helped. Last year, India-registered PE funds, which are category II Alternative Investment Funds, were allowed to make pre-IPO investments in companies.

For Devinjit Singh of Xponentia, a key factor that encourages his decision to jump into entrepreneurship was how often Indian family offices that manage investments of business families were being discussed in PE circles, and how their structures were changing to become more aligned with investing in PE funds. “Most such families have limited or no allocation to alternative assets such as private equity, and as economies evolve this is bound to change. Private equity provides a much needed diversification for their portfolios, and I believe will drive the growth of local asset managers such as Xponentia,” he says.

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Sponsored funds like Tata Capital PE also changed how these kind of funds operate. They wrote in rules to ensure they won’t end up investing in lacklustre group companies, which is a big worry with sponsored funds.

Akhil Awasthi, the head of the growth fund at Tata Capital PE, points out that the landscape for PE funds in India has changed in many more ways apart from local money being available. He says: “Boundaries are disappearing. Most sectoral funds, apart from realty, have not worked and they are being merged. PE funds are also facing competition from early-stage investors like venture funds in the deals that are in the range of $50 million.” Instead of sectors, Awasthi now invests on themes, such as urbanisation.

The global PEs have also followed cues. To take on the Indian opportunity properly and the lack of buyout deals in India, the global PEs have merged their teams. Carlyle merged their growth and buyout teams recently, possibly triggering the exodus in personnel. TPG Capital and TPG Growth, too, have merged their PE teams in India. TPG Growth used to look at deals below $70 million in size.

Meanwhile, a route to buyouttype control has also opened up. The NCLT and the insolvency resolution process for debt-laden businesses now offers complete control. India has seen distressed funds being set up. One of them, a Piramal-Bain tie-up, had recently locked horns with Aditya Birla Group for a takeover of Binani Cements. Neeraj Bharadwaj heads Carlyle India, a global PE Fund that is also grappling with exodus of senior management. Bharadwaj, who grew up in different cities of north India following his bureaucrat father’s postings, sees value in old things. For instance, he even wears his late father’s Titan watch, in the old fashioned manner with the dial placed on the inside of the wrist. However, when it comes to NCLT, Bharadwaj is clear it is a wholly new ball game and Carlyle will not enter a sector just because it is available. “We are looking at options. I think the sectors we like will be sectors which we invest in globally.” He emphasises that the game of turning around a company is different from backing an entrepreneur — it will need re-building of the management and hiring a new CEO.

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Incidentally, the industry has an association or an advocacy body of its own. Padmanabh Sinha, who heads the opportunities fund at Tata Capital, is also currently the chairman of the Indian Private Equity and Venture Capital Association (IVCA). The IVCA has been engaging with the central government and also spending time on educating Indian investors. Sinha says: “In China, the domestic investor base in private equity funds is huge. In comparison, it is far smaller in India.” IVCA has more than 130 members as of now.

Narayanan of Sanaka also feels there is a long way ahead for India. While on the one hand walls have collapsed between different kinds of funds, there is still a need to have a variety in approach. “We are still a very young industry. India, being the fastest growing large economy in the world with a buoyant entrepreneur ecosystem, will needs billions of dollars of investment each year through private equity to achieve the growth aspirations. I believe the industry will have various types of funds to provide the capital,” he says.

The challenges ahead are clear. For maturity, Indian PE industry will have to show it has returned more money overall than what has been invested in the funds by investors. Exits must be higher than investments at the industry level. Not just year wise, but also at the cumulative level. And so while the new funds will make news, the performance of the older ones will also have to be keenly watched.

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