Small BusinessUS bank curbs may hit fund-raising by PEs
But, will help Indian funds get more deals.
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Fund-raising may become tough for Indian private equity (PE) players if US President Barack Obama’s proposal to curb the role of commercial banks in hedge and PE funds is implemented. But the move could help Indian funds take part in more deals, market players said.
Obama yesterday unveiled a proposal to bar commercial banks from owning, advising and investing their own capital in PE and hedge funds.
THE STORY SO FAR
US-based banks" investments in India since 2007
Company
Investor
Amount ($ mn)
DLF - Akruti SPV
Merrill Lynch
361.0
IRB Infrastructure Developers
Deutsche Bank, Merrill
Lynch, Goldman Sachs
60.0
Vestas RRB India
Merrill Lynch
55.0
BPTP SPV
Merrill Lynch
51.0
Shriram City Union Finance
ChrysCapital, Merrill
Lynch, CPIM Funds
42.7
Zoom Entertainment Network
Merrill Lynch
30.0
Narayana Hrudayalaya
JP Morgan, AIG
100.0
RMZ Corporation SPV
AIG
50.0
Avasarala Technologies
AIG
20.0
Uniparts India
AIG
20.0
Firepro Systems
AIG
12.0
Kinetic Engineering
AIG
7.0
Source: Venture Intelligence
Though most investors in Indian PE funds are university funds, endowment funds, pension funds, insurance funds and institutional investors, the industry expects the move to impact fund-raising in the long term, as banks will be barred from taking part in these funds.
A large number of venture capital and PE funds of US-based commercial banks had reduced their exposure to India during the economic slowdown, although some such as Goldman Sachs stayed in the market. Recently, Goldman Sachs pumped in $115 million into Max India from its $20.3-billion GS Capital Partners VI fund, formed in 2007 to invest in a broad range of industries globally. Indian PE players hope to get more deals if these players vacate the market.
“Competition from US banks in this space has almost disappeared. Their absence will help Indian PEs get more deals,” said Arun Natarajan of Venture Intelligence.
According to Venture Intelligence data, during the last three years, Merrill Lynch participated in 11 deals in India and invested $315 million, while American Insurance Group invested $182 million in eight deals. The two invested $412 million and $50 million each, respectively, in real estate deals.
“VC funds like to continue with the same set of investors. Banks like JP Morgan like to put in fairly large amounts. We are investing from our core fund, which has a corpus of $650 million, with an India allocation of 10-15 per cent,” said Mohanjit Jolly, executive director at venture fund Draper Fisher Jurvetson India.
“Fresh commitments will be hit in the long term. We do not see any significant impact in the next eight to ten months, but the US is a huge market and any slowdown there will impact the Indian private equity industry,” said Harish, partner at Grant Thornton, a research firm.
“Fund-raising is already challenging and will become more difficult. Banks were anyway averse to investing in the downturn but they are only one contributor of funds. Although we have seen some improvement over the past few months, it’s still tough going. Any curbs will make it more difficult,” said Rajesh Singhal, managing director at PE firm Milestone Capital Advisors. Industry players say the focus will shift from funds of banks to fund of funds, pension funds, and university and endowment funds.
“It will be difficult to put a number as these transactions are structured in a complex manner. But I believe a significant proportion of investments in India-based PE funds come from balance sheets of these banks. These firms will be affected and will have to look for new sources of money,” said Jagannadham Thunuguntla, equity head at SMC Capitals.