PE investors avoiding ‘blind pool’ investments, demand more control over their money

Gone are the days when investors would put money in a ‘blind pool’. They are now demanding a say in the choice of investment sectors, as well as returns and a shorter time frame

A key issue faced by private equity firms (called General Partners, also referred to as GPs) is the demand for transparency from investors (known as Limited Partners, or also LPs), as well as for sector specific investments and a shortened time frame within which they can exit their investments.

Speaking on the sidelines of the Indian Private Investors Conference (IPIC) in Mumbai last week, Anubha Shrivastava, managing director, Asia for CDC Group plc, said, "The world has changed after the financial crisis. The LPs today hesitate to make blind pool investments. They want industry specific investment." The entire money coming into a PE fund is pooled and invested at the discretion of the fund managers, usually in proportion to the contribution of investors. But now investors want to be involved in the process of investment.

The desire to exercise greater control over investment is a result of high expectations and the promise from private equity in 2007, which unfortunately got short-circuited by the financial crisis. Many high net-worth individuals (HNIs) are stuck with their earlier investments.

Also, HNIs who have made money from being entrepreneurs in control of finances do not want to lose control of their investments. One of the concerns LPs have is the lack of knowledge and the status of their investment over the years. This could change, as GPs may allow LPs an 'observer' status in the investment committee, involve them in specific deals, give regular information through an annual conference, and so on.

The discomfort with the long-term nature of investment is also due to the lack of liquidity. This has given rise to the need for a shortened time frame for exiting the investment. The ways for GP exits are IPOs, secondary sale to another PE fund or to strategic investors. Often, GPs are not able to make a planned exit due to numerous reasons. Then they are compelled to go for another round of fund-raising, sometimes diluting the returns of original investors. That is another reason investors need to have a sense of control over how their investments are faring.

Private equity represents investment in equity capital of companies that are not publicly traded on the stock exchange.  This asset class took off in India in 2004 and is now in a fresh phase of growth, post the global financial crisis.

According to Jairaj Purandare, leader financial services, PricewaterhouseCoopers (PwC) India, "Private Equity investment in India between 2004 and 2009 was as much as $40 billion. About $70 billion is expected to flow in between 2010 and 2013. India is the second most-favored destination for foreign direct investment (FDI) after China. India is also the fifth largest consumer economy. We have low dependency on exports and a high share of services in GDP. There is strong rural income and consumption. The domestic savings rate is high, as well as investments. There is a liberalising regulatory regime with 100% FDI barring certain sectors. FII investments are allowed in government securities and corporate bonds. These are all favorable trends for the private equity industry."


Forex inflows seen jumping 70% to $91.3 billion

Mumbai: Leading macroeconomic research agency Centre for Monitoring Indian Economy (CMIE) has forecast capital flows topping $91 billion by the end of the fiscal, a staggering 70% over $53.6 billion that the country received last fiscal, reports PTI.

"We expect the net capital inflows into the country touching $91.3 billion by the end of this fiscal and $68.8 billion by the end of the December quarter," CMIE said in its monthly review of the economy.

The agency's monthly macroeconomic report says this record spike is on the back of the massive inflow of $30.4 billion in the September quarter alone.

For the foreign funds looking for high returns on the back of dirt-cheap funds from their homes markets where returns are negligible, India and especially its stock markets has been the hot cake.

In September-October alone, they had pumped in nearly $13 billion into domestic equities.

The record fund flows have been a cause of worry for the planners as a whole, and especially for Reserve Bank of India (RBI), which has been finding it difficult to contain the high inflationary pressures, mostly driven by abnormally high food prices, despite six consecutive rounds of rate hikes.

The wholesale price index (WPI) based inflation in October inched down by a notch to 8.58% from 8.62% in the previous month, while food inflation though has been declining for the past four weeks still remains at an elevated at 12.30% for the week ended 30th October.

The fear of currency volatility of the fast emerging markets is further compounded by the second quantitative easing of the US Federal Reserves amounting to $600 billion more of money it is planning to pump into the tottering economy, as they fear that this would further fuel the capital inflows into these markets.

The report says portfolio investments are alone expected to be of $16.3 billion during the April-October period, while overall inflows are expected to top $28.5 billion during the period.

Foreign Direct Investment (FDI) is expected to be around $15.7 billion during the April-October period, which is $1.7 billion a month.


Need regulator to monitor teaser rates: Basu

New Delhi: With some lenders averse to discontinuing controversial teaser rates offered on loans, chief economic advisor Kaushik Basu today called for setting up a regulatory authority to monitor such schemes, reports PTI.

"Instead of banning teaser rates, we can have independent experts who can prescribe about them like doctors prescribe steroids. My view is that we can have a professional body, which will have a right to say whether you are making a good judgement or not...," Mr Basu said during a summit at the International Management Institute.

Recalling the role of teaser rates in the US subprime mortgage crisis, Mr Basu said action to regulate the schemes announced by various banks should be decided on a case-by-case basis.

"I am acutely aware of over-regulation... At the same time, there is no getting away from regulation. Having a prescription means there are dangers, but also there are values in the product," he said.

Teaser rates are multi-year loans where lenders give concessional rates to borrowers initially and charge high rates subsequently.

The Reserve Bank of India (RBI) has voiced concern over the high risk of default on loans offered at teaser rates and had tightened the noose around this product in its 2nd November policy review.

At its latest review meeting, the RBI had asked banks to keep more money aside for offering such products to provide a cushion against any default.

According to the apex bank, some banks do not take into account the repayment capacity of the borrowers at normal lending rates at the time of initial appraisal.

"In view of the higher risks with such loans," RBI said it is proposed "to increase the standard asset provisioning by commercial banks for all such loans to 2%."

Earlier, provisioning against loans offered at teaser rates was 0.4%.

A few months ago, the RBI had asked lenders to do away with teaser rates on loans entirely. However, many of the banks did not comply with the recommendation, arguing that loan offtake would be impacted adversely.

Most recently, State Bank of India chairman O P Bhatt last week ruled out scrapping teaser rates schemes offered by lenders, as proposed by Housing Development Finance Corporation chairman Deepak Parekh.

"Financial markets will need regulation... financial products will have to be regulated," Mr Basu said.


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