Following a spate of consolidation, the number of private equity funds investing in India, excluding real estate funds, has now dwindled to 200-odd from as many as 500 funds in 2007-08.

The reasons for closure of funds or withdrawal ranged from bad investments to fund-raising issues and limited partners (LPs) withdrawing support, according to PwC India Executive Director and Leader — Private Equity Sanjeev Krishan.

In 2014, secondary sales would continue to be the main focus in the near term, while information technology, e-commerce and life sciences would top investors’ list. However, fund raising would continue to be an issue, Krishan said in a tete-à-tete with Business Line. Excerpts:

Many PE firms have shut shop during the past five to six years. What are the reasons and do you see further consolidation happening in the sector?

A lot of funds have already shut shop as they did not have a great track record. Some of these small funds, with corpus of $150-200 million, made bad investments. Many of them could not even invest their complete corpus, resulting in LPs withdrawing allocations.

Either because they made bad investments, or LPs withdrew support, or they couldn’t raise further funding, many funds have closed down or withdrew from India.

Has fund raising been a challenge for India in recent times?

It has been a challenge in recent times. A number of general partners had not done well compared with the investments of 2006, 2007 and 2008. Also, India’s macros have not been all that great for the last three to four years, there has been policy paralysis, and issues related to governance. LPs have been watching all these and they are cagey about committing additional funding for India. I think in the near term this will continue to be an issue.

We are seeing some LPs directly wanting to invest in India already, and I think this is an emerging theme. So, fund raising for India, at this juncture is a challenge.

Is India ready for the Real Estate Investment Trust (REIT) regime?

I think, institutionally, India might be some time away from acknowledging the REIT regime. In the interim, Singapore will continue to work.

On the emerging trends in the PE space…

A new theme that has come in over the last two to three years is funds investing through NBFC vehicles.

They are not doing traditional PE, but structured finance transactions. In the next two to three years, even though India will continue to be a growth capital market, the share of buyout will increase.

Another emerging trend, to my mind, would be the LPs starting to invest in India directly.

In 2013, the preferred modes of exits were buybacks and secondary sales. What do you think would be the chosen exit models this year?

In the near term, secondary sales would continue to be the main focus.

The strategic investors from Japan are quite focused on India and that will result in some strategic sales. I think if foreign investors come back to the country, then the strategic sale route would open up.

Going forward, which are the sectors that would be on top of the mind of PE investors this year?

The sectors that would be in focus would be information technology, e-commerce, life sciences, healthcare, consumer, warehousing and logistics. Infrastructure and infrastructure services are not going to be of interest.

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