Overseas PE funds help the rich diversify

Sitting in his Nariman Point office, 42-year-old chartered accountant Gaurang Mehta (name changed) tracks his portfolio, which has a handsome mix of bluechips, mid-caps and even illiquid stocks.

But, this high networth individual (HNI) is also keen to diversify his investments into other assets outside the country like the banking sector in China or the real estate sector in Indonesia.

Help was at hand when a UK-based bank recently came up with a private equity fund-of-funds (PE FoF), which would invest in seven private equity funds.

The PE FoF will invest in private equity funds that have been investing in the real estate sector in Indonesia, banking in China and mining in Latin America.

Mehta, along with his four family members, has invested around $2,50,000 in a fund of funds scheme offered by the UK-based bank.

Earlier, about six months back, when the RBI hiked the overseas individual investment limit to $50,000, the first PE FoF launched in the country collected nearly $30 million from India.

Indian investors accounted for 30 per cent of the fund's total corpus, while the minimum ticket size (entry level) stood at $2,50,000. The investors, all of them HNIs and ultra HNIs invested with their family members or a group of friends to meet the ticket size.

With the Reserve Bank of India hiking overseas investment limits to $1,00,000 per individual on Tuesday, the scenario looks brighter.

"Investing in direct equities overseas is not easy as investors have to meet stringent KYC norms of the US regulator. Investing in hedge funds is possible, but the minimum investment size is many times higher than the permitted limit. For PE FoF schemes, the investor just needs to register with the bank that is floating the scheme. This is comparatively very easy," Nipun Mehta, CEO of Unitis Tower Wealth Advisors Pvt Ltd., which acted as an advisor for these investments, said.

The schemes have a long-term duration of 10-12 years, and distribution of returns begins after nearly three years. They mainly invest into private companies, but could also finance a project under a special purpose vehicle (SPV) with the PE partner.

One such fund has investments in 270 companies, of which 250 were privately held firms that went public as soon as they received investments from the SPV.

Traditionally these funds have given around 15-20 per cent returns. Their investment methodology is flexible. They have a defined exposure for each region.

Most of them follow the payout method, whereby on exit from a specific venture, the fund returns part of the capital as well as the dividend earned on it to the investor, reducing the risk for investors. They also disclose their investment portfolio," said Mehta.