Financiers sidestep India for China, Russia

Fear of lower returns, shrinking accessible market, a series of corporate scams and a slowing Indian economy are forcing limited partners (LPs) to prefer China and Russia over India despite cheaper assets available.

Limited partners (LPs) are global financial institutions who offer money to private equity funds or general partners (GPs) to invest in companies. "LPs have a choice and capital is scarce," says the managing director of a private equity fund. "There is a mismatch in value between the seller and buyer in a volatile market." LPs look to China for better returns in their fund life anywhere between seven to 10 years.

"By investing in India, LPs are taking more risks than in China," says Hiro Mizuno, head of Asia at leading secondaries fund Coller Capital. "It is very difficult to persuade ourselves to invest in India."

PE funds made an overall internal rate of return of 17.9 per cent from India and 20.4 per cent from China, according a study by audit and consulting firm KPMG India released on December 1.

"There is no such single best performing general partner in India that can set an example of best returns," says the managing director of an American asset management company on condition of anonymity.

But, some LPs say India is still an investment destination despite concerns on market volatility and slowing economy. "I would advise the first-time LPs to come to India because you would make money at times when markets are in turmoil and where there is scarcity of capital and need for it in India," says Bruno Raschle, executive chairman at fund-of-funds Adveq Management AG that has been an active investor in India since 2005.

Some fund managers say LPs are not making enough efforts to invest in India despite a strong cash pile. "There is not much effort by foreign LPs to explore the Indian market here," says Mukund Rajan, managing partner at Tata Capital's Tata Opportunities Fund. LPs were sitting on cash because of the slow economic growth in Europe.

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