Past Reports

Exhibit 5
Direct Investments from LPs:
An indication of change
Direct LP investments: What ar e they?
LPs, domestic and foreign alike, traditionally routed their investments in PE through the VCPE funds. The VCPE funds are
managed by the GPs whose duties and responsibilities spanned beyond collection of funds to getting involved in the
proper operation of the investee companies and making the portfolio companies profitable. But somehow the
performance of the GPs in ameliorating the performance of the investee companies have failed to yield the desired
results, creating an overall sense of dissatisfaction among the LPs (see Exhibit 6 on the returns earned in various
investments). The extra cost that the LPs have to bear in the form of fund management fees as well as sharing of profits
(known as carry income) with the GPs aggravated the discontent of the LPs. As a result, the LPs have started making
investments in companies directly, rather than through a VCPE fund, thereby bypassing the GPs. These direct
investments are getting more popular among the LPs with time as they have realized the benefits attainable by
separating the GPs from the investment chain. In such direct investments, the returns from the investments can be
savoured directly by the LPs. Also by bypassing the GPs from the investment chain, the LPs can now be involved in the
day to day activities of the companies and monitor their investee companies more closely. Thus, the direct investment
by the LPs in the companies is gaining popularity and many LPs are slowly starting to follow this path while also
investing in the regular path, i.e. through funds. Included within direct investments is a category called co-investments,
where LPs co-invest in a company along with the VCPE funds in which they have invested.
Trends in Dir ect LP investmen ts
The data used in the analysis was collected from VCC Edge, the VC and PE investment data base from VC Circle. The
dataset that was used in the analysis comprised a total of 836 deals involving 96 LPs in 655 different companies. Among
these 655 companies, 146 were co-investments, i.e., LPs have invested directly as well as through the VCPE funds in
which they have invested. Out of the 836 deals, investment details were available for only 419 of these deals. Our
dataset indicated that the total direct investment in companies by LPs have been to the tune of $17 billion in these 419
deals. The average investment size in a direct investment was $7.76 million (after removing outlier investments), and
the average stake acquired has been 14.59%. In terms of exit patterns, our data set showed that a high proportion of
the exits (>95%) were through secondary sale. Though investments were seen in both listed and unlisted companies, a
majority of the deals were in unlisted companies.
6.25% 2.08% 1.04% 1.04% Asset Manager
8.33%
10.42%
41.67%
Commercial Bank & Financial
institution
Corporation
Government Agency &
Development Institution
Insurance Company
MLA & Others
29.17%
Pension Fund
University Endowment &
Foundation
Figure E5.1: Direct investments (by number of deals) by different LPs
Figure E5.1 gives the proportion of deals made by different categories of LPs. It can be seen that LPs in the asset
manager category account for the highest proportion of the direct LP investments. Analysis done in Chapters 1 and 6
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