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India Venture Capital and Private Equity Report 2014 Figure 1.1: Schematic representation of the LP-GP structure This years' report pertains the fund raising stage of the VCPE lifecycle. The fund raising stage starts with the VCPE firm (the asset manager or the GP) conceptualising the fund and its objectives. The GPs then approach different investors (the LPs) inviting them to invest in the fund. If the LPs find the fund investment proposition attractive, they commit to contributing to the fund. Once the GPs are able to secure commitments from various LPs so that the fund is fully subscribed, the fund is closed for further subscription. This marks the end of the fund raising stage. It is normal to have GPs normally manage several funds concurrently - each having different fund objectives, size, and life. Each and every fund would have their own set of LPs, i.e., a LP who has committed to fund A managed by a GP, may not necessarily be an investor in fund B managed by the same GP. The India VCPE report series is an annual publication of the Indian Institute of Technology Madras. Each and every report focuses on a specific aspect of the VCPE industry. The 2014 report focuses on the LPs for two reasons. First, there has been limited study and analysis on the LP segment in India. Second, the growth of the VCPE industry in India is also dependent on the availability of capital to the VCPE firms. Since the VCPE firms get their capital (or at least most of it) from the LPs, insights from the study of the LP investors can help in plotting the future growth of the industry. 1.2 The LP universe We classify the universe of LPs into two broad categories: Institutional LPs and others. The former would comprise of institutions and corporations that invest in VCPE funds. The latter category would comprise would comprise of the following types of investors – retail investors, high networth individuals, and family offices. This chapter focuses only on the analysis of institutional LPs, since the information availability for these categories of investors is better. Analysis of retail and high networth individuals has been done in Chapter 5. 1.3 Classification of the institutional LPs Our analysis is based on a sample of 420 institutional LPs, which we considered as fairly representative, though not exhaustive. The details of the LPs and the various funds they have invested in were obtained from two data sources - VCC Edge the Venture Intelligence. The data was based on the commitments made by LPs to various funds raised between 1990 and 2014. The LPs considered here does not include those who have invested in infrastructure and real estate funds. Given the intrinsic differences between the conventional PE funds and the infrastructure and real estate PE funds, we decided to keep these two sectors out of scope for this report. Table 1.1 gives the break-up of the sample on different parameters: origin, background, and type. Based on the origin, the LP's were classified into two categories: domestic and foreign. On the basis of their background, the LP's were classified into three categories: public (the LPs in the public sector, but having a commercial focus - for example, the State Bank of India), private (the LPs in the private sector), and developmental focused (these included investors whose primary objective was not financial returns. Their decision was largely based on social or strategic objectives). Based on the type of the organization of the LP, the sample was classified into eight categories: Asset managers / Fund of Funds, commercial banks and financial institutions, business corporations, government agencies and development institutions, insurance companies, pension funds, and university endowments and foundations. © Indian Institute of Technology Madras 2
India Venture Capital and Private Equity Report 2014 Table 1.1: Proportion of LP's in different categories (N=420) Type Number Percentage of Total Panel A: Classification by LP origin Domestic 90 21.43% Foreign 330 78.57% Panel B: Classification by LP orientation Private sector 282 67.14% Public sector 92 21.9% Development focused 46 10.96% Panel C: Classification by LP type Asset managers / Fund of funds 167 39.76% Commercial banks & financial institutions 75 17.86% Corporations 47 11.19% Government agencies & development institutions 38 9.05% Insurance companies 20 4.76% Multi-lateral agencies and others 5 1.19% Pension funds 22 5.24% University endowments & foundations 46 10.95% As expected, a large proportion of LPs have a foreign origin. Foreign LPs are able to make large commitments (see later), and as indicated by one of the respondents, "they are sophisticated investors and have a better understanding of private equity as an asset class." On the other hand, in addition to financial returns, more number of domestic investors would result in better support to companies that have a strong relevance in the Indian context. Classification of the LPs on the basis of the orientation showed that private sector LPs accounted for the highest proportion. However, what is interesting to note is that public sector investors also account for a significant proportion. This shows the important role played by the government and public sector institutions in providing risk capital for businesses. While public sector LPs have goals for financial return as much as that of private sector LPs, they do consider the social angle in their investment decisions. For example an Indian public sector insurance major indicated that they prefer to invest in the health sector, not just for the financial returns, but also for the social impact. Table 1.2: Cross tabulation of LPs on with respect to their origin Type Panel A: Cross tabulation for LP orientation Domestic LPs (N=90) Foreign LPs (N=330) Private sector 46.7% 72.7% Public sector 40% 17% Development focused 13.3% 10.3% Panel B: Cross tabulation for LP type Asset managers / Fund of funds 17.78% 45.76% Commercial banks & financial institutions 37.78% 12.42% Corporations 20% 8.79% Government agencies & development institutions 15.56% 7.27% Insurance companies 8.89% 3.64% Multi-lateral agencies and others - 1.52% Pension funds - 6.67% University endowments & foundations - 13.94% Analysing the LPs on the basis of type indicated that the Asset Manager (or Fund of Funds, FoF) category accounted for the highest proportion. The top four categories, i.e., asset managers, commercial banks and © Indian Institute of Technology Madras 3
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Exhibit 6 Returns from VCPE investm
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however, accounted for only 17% of
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