Venture Intelligence recently spoke with Brian Lim, Portfolio Director (Pan-Asia) at CDC Group, on recent trends in the Indian Private Equity market. CDC, a UK government-owned fund-of-funds with net assets of $4 billion, is one of the oldest and most active investors in India via its exposure to funds like Actis, Aureos Capital, Avigo Capital, Baring PE India, BTS India PE, ICICI Venture, IDFC PE, India Value Fund and Lok Capital.
Venture Intelligence: 2007 witnessed a slowdown in terms of new funds being closed. What do you expect for 2008?
Brian Lim: 2006 had seen a lot of established fund managers successfully raising follow-on funds, while 2007 witnessed more first-time funds in the market. In 2008, we can expect to see managers who closed in 2006 to come back to the market and hence expect more funds being closed.
VI: Are you concerned about Indian managers coming back too soon to raise new funds?
BL: The 'fast investing pace' is true for most GPs in the market. To asses if it's too early / quick, we need to evaluate how the existing portfolio is shaping up, how disciplined the manager has been, etc. At this point, there aren't any signs of big mistakes or blow ups.
VI: Is the trend towards raising larger and larger funds a good one?
BL: The phenomenon of funds getting bigger is a natural evolution of the market. There are several opportunities in India (for deploying capital) including restructuring, Cross Border M&As, etc. But managers shouldn’t get carried away and raise so big a fund that it becomes a challenge to find appropriate deal flow.
Also, as some funds get bigger, it opens up opportunities for new entrants. For example, the older funds now seem to be vacating the sub-$10 million segment.
VI: Any other segments that you notice as not adequately addressed?
BL: The smaller (sub-$10 million deal size) end of the market is an interesting space. The VC end has come up really quickly. There are also interesting opportunities to do buyouts.
VI: What is your take on various Indian corporate groups like the Tatas and Birlas launching PE funds?
BL: This trend seems to be pretty unique to India. In any case, I don’t think depth of experience in operating businesses alone is not sufficient. One needs to consider other factors necessary for success in investing. The bottom line (in the PE business) is that it is a lot about people: experience in doing PE deals, execution and long term alignment of interest between the managers and investors.
It remains to be seen how funds launched by corporate groups are able to align the interest of professional managers. I expect such funds to face stiff competition from the established PE groups.
VI: What are your return expectations from Indian PE funds?
BL: Like in the case of other emerging markets, we expect 25%+ IRR from our Indian funds. A key point is that growth in India is purely based on earnings growth compared to other developed markets which is characterized by financial engineering. Also, the climate for exits is quite good, providing the right ingredients for generating good returns.
VI: Apart from valuations, are there any other top-of-mind concerns about the Indian market?
BL: Retaining people is going to be a key challenge as more funds enter the market. It is going to be very important for fund managers to address the retention issue adequately.
VI: Most of CDC's investments have been into mid-market and later stage PE funds. Does CDC back VC funds?
BL: Yes, we do back VC funds and are looking to add some GP relationships in this segment in India over time.
(Note: During the interview, Brian clarified that CDC had been misquoted in a recent report in the Indian business media saying that it was launching a direct VC fund for India. Brian emphasized that CDC would remain a Limited Partner in PE funds and had no plans to become a direct investor.)