Archive for March, 2018

India: Fertile Ground for GP-leds?

Posted by Muhammad Ibrahim Masudi

Asset and manager quality still pose problems for secondaries buyers in a market where many funds are coming to the end of their lives with large amounts of remaining NAV.

The idea of investing in India, with its burgeoning technology sector, has long been attractive to private equity firms. The country was experiencing an increase in private inflows when the 2008 financial crisis blew the doors open, as investors were compelled to look further afield for returns.

According to data from EMPEA, 100 firms launched private equity vehicles targeting India between 2006 and 2009. In 2008, $8 billion was raised for India-focused private equity funds, a level not seen before or since.

It is clear the country wasn’t ready for this influx. Huge amounts of dry powder were met by unpalatably high valuations. A lack of exit opportunities and the appreciation of the dollar, among other significant challenges, added to the deployment struggle.

“[This] all added up to a comedy of errors, with the end result being that India’s private equity performance did not meet expectations and both GPs and LPs lost money,” wrote EMPEA in its 2016 Private Equity in India report.

A decade later India is a more pronounced version of what has taken place elsewhere: funds coming to the end of their lives with a lot of net asset value and GPs and LPs with different ideas of what should happen next. Consequently, there has been a marked increase in secondaries opportunities, with HarbourVest Partners, NewQuest Capital Partners and TR Capitalamong those lining up to
take advantage.

“A lot of PE managers understand we are the solution to the problem,” said one secondaries manager.

Potential but not there yet

Secondaries buyers encounter three main types of situation in India: crisis-era GPs that raised a fund but were not able to raise another, those who were able to raise a second but not a third, and teams investing in India from global funds looking for a partial or total withdrawal.

The first two sets of circumstances throw up many opportunities for GP-led processes. These GPs are often under pressure to generate returns for their LPs and show that they still have a proposition worth investing in, or they at least want to maintain a stream of fees for as long as they can.

Such deals can be tricky. Often key people have left the fund, weakening the alignment between GPs and LPs and resulting in a lack of vision as to how portfolio companies will achieve exit. This is especially critical in an emerging market, where less developed capital markets can make holding periods longer. Where such transactions do make sense, they tend to be the preserve of Asia specialist secondaries firms.

“Your large global secondaries funds are not likely to be interested in them,” says Amit Gupta, partner and head of India at NewQuest. “They are complex deals. You have to align the team in the right way and ensure that a lot of things fall into place; it’s just not what global secondaries funds want to do.”

The third type of deal, which involves global funds seeking to reduce or eliminate their exposure to India, is most attractive to global secondaries funds, given the established names involved. These nearly always take the form of a direct secondaries sale, such as media company IDG’s 2017 disposal a number of Indian stake as part of a $600-million-plus portfolio sale to a consortium led by HarbourVest.

Warburg Pincus showed last year, with its $1.2 billion sale of a strip of Asian assets, that a direct secondaries sale isn’t the only way to reduce exposure to a market. While no market sources Secondaries Investorspoke to for this piece believed that a deal of similar magnitude was likely in Asia this year, many hoped that as GP-led deals gain traction in India, more global names will choose to stick it out with a fund extension rather than leave the market.

“Many VC funds have taken a call because of lack of liquidity and longer hold cycles [in India] compared to their global cycles,” says one secondaries buyer. “You still have the whole team, the right information, the basic management structure of the portfolio – that’s where I think there will be a lot more [GP-led] deals.”

Awareness of GP-led processes does seem to be growing among GPs. According to Gupta, 80 percent of managers he speaks to know how a GP-led restructuring works, even if they don’t believe it is the right solution for them.

Sabina Sammartino, head of secondaries advisory at Mercury Capital Advisors, which opened a New Delhi office in January to add to its deal origination and project management business, says she expects to see an increase in the number of complex secondaries deals in India over the next 12-18 months.

“Valuations are quite full [in Indian VC] which coupled with still limited realisations should trigger an increasing number of secondaries transactions,” she said. “As we have seen in the US and Europe, as more transactions get done, the level of comfort, the knowledge and understanding will increase.”

Fund Managers Flush With Capital, but Not Opportunities

Posted by Muhammad Ibrahim Masudi

Capital, capital everywhere, but no place to invest.
That’s the quandary facing managers of high-yield real estate funds.
By any measure, their industry is booming, with both the number of vehicles and the amount of equity commitments at record levels. But finding suitable investments for all that capital is becoming harder and harder, because the long-running bull market has driven valuations sky-high. As a result, fund managers are lowering their return goals and sitting on an unprecedented hoard of uninvested capital.
Those are key findings of Real Estate Alert’s 22nd annual review of closed-end commingled funds that seek yields of at least 10% by investing in commercial real estate. The review identified a record 488 active vehicles, up 5% from 466 a year ago.
Those funds are managed by a record 392 operators, up from the previous high of 374 last year. They have set an aggregate $339.9 billion equity goal and have already raised $261.3 billion of that amount (or slightly more than three-quarters) — also new highs.
But a whopping 72% of those commitments, or $186.9 billion, is still uninvested. That tally is up 14% from a revised $164.5 billion of dry powder last year and nearly double the $97.9 billion level in 2015.
The reason why is no mystery: Fund managers see fewer opportunities that fit their return goals. “I’ve heard people say there are too many dollars chasing too few deals every year for virtually my whole career and certainly since the market picked up,” said Alan Pardee, co-founder of New York placement agent Mercury Capital. “But we’re at a crescendo now, to be sure.”
Indeed, many pros think that valuations are at or even past the peak in many markets. That sentiment is evidenced by the fact that large property sales across asset classes fell by 10% last year, albeit still logging the third-highest level ever, according to Real Estate Alert’s Deal Database, which tracks sales of $25 million and up.



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