1. Limited Partners Want Unlimited Say in PE Funds
Demand lower fee from managers, more bang for buck & higher control
Five PE funds — IL&FS, ICICI Venture, CX Partners, Multiples Alternative and
India Equity Partners — that are now trying to raise a combined $1.5-2 billion are
locked in intense negotiations with limited partners over new terms that could redefine
the performance-profit equation for PE fund managers, sources privy to the negotiations
said. Limited partners, or LPs, are institutions that put down the money that PE funds go
on to invest. According to top officials from two large and active LPs, and at least three
PE funds currently raising money, limited partners are demanding that fees be charged
only on actual amounts invested (drawdowns), and not on the total money raised. The
PE fund managers — also known as general partners (GPs) — manage money in return
for a fee and a percentage of the returns they generate with the fund (carry). The industry
has lived with a broad 2:20 formula for two decades now — PE funds keep 2% of the
corpus as annual fees and 20% of profits as ‘carry’. This is now up for re-negotiation.
“LPs are negotiating with GPs on the fee. We may see the commitment-based fee
payment structure change to a drawdown based fee structure,” said Shagoofa Khan,
senior vice-president and legal head, Kotak Investment Advisors. “Some LPs may also
seek more GP skin in the game by asking them for higher sponsor commitments,” she
added. LPs also want more control in areas such as composition of fund team, its
investment focus, etc. The new and stringent demands from LPs are a direct fallout of
the poor performance of PE funds in India. Funds have made only $15 billion to $20
billion in exits from the $60 billion invested so far; investment cycles are becoming
longer and funds are generating a mere 14-15% internal rate of return (IRR) against
promises of 25% made to LPs earlier. “New capital will only be committed on newer
terms that adjust to new market reality,” said a global LP, which invested $1 billion in
India. It is looking to commit another $200-250 million annually. LPs Want More
Direct Say
Sources involved in fund-raising said LPs also want a more direct say in the team that
manages the PE fund. Industry sources say New Silk Route recently hired Rajeev Gupta
at the insistence of LPs, even though the fund has already deployed 70% of its corpus.
LPs are also forcing fund managers to commit to a narrow and pre-defined investment
focus. Sources said ICICI Venture’s new distressed asset fund has ceded LPs’ demand
that it should not invest in sectors other than consumer, financial services, industrials,
pharma and hospitality.
“Gone are the days when just an India fund could attract a lot of capital. Today, LPs
want you (GPs) to narrow down the investment strategy to just a few sectors and only
focus on them,” said Mahendra Swarup, managing director at Avigo Capital, a $500-
million fund. “They also want the team to be fully equipped to manage those sectors.”

2. LPs also expect more detailed and specific compliance.
“Rather than taking a standard undertaking as earlier, LPs now want a well-laid
compliance programme to steer clear of the (US’) Foreign Corrupt Practices Act (FCPA)
and anti-bribery laws back home,” Swarup added. In the past, fund managers have
compromised on due diligence and overlooked corporate governance and compliance
red flags in the quest for better returns. More than a few such investments have gone
awry.
Currency fluctuations have also added to PEs’ bag of woes. “The LPs, which have
always looked at dollar to dollar returns, are now factoring around 5% currency
depreciation every year and are expecting GPs to still generate decent IRR,” said
Asheley Menezes, managing director, ChrysCapital. The next round of fund-raising is
going to be tough for India-focused PE funds, he added. “LPs have now started asking
too many questions.”
CREATED BY TEAM PGC
PROGLOBAL CORP
WWW.PROGLOBALCORP.COM
Proglobalcorp.wordpress.com
Email:proglobalcorp@gmail.com