Liberalising the norms to allow more domestic capital from pension funds could increase fund flow into the private equity (PE) and venture capital (VC) sector, says a report by IIT Madras.
In the US, nearly 70 per cent of PE and VC commitment are from pension funds, foundations and university endowments, while these categories accounted for just eight per cent of the commitments in India, the report - The Fuel for Wealth Creation - noted, which focuses on limited partners (LPs) and VC and PE firms which are general partners (GPs).
"The comparison of commitments made in India and the US indicate that governments, banks, and financial institutions account for more than 90 per cent of the commitment in India, whereas in the US, the same categories account for only 30 per cent," said Thillai Rajan of IIT-Madras.
Being long-term sources of funding with defined cash inflows and outflows, pension funds can be ideal sources for VC/PE funds.
However, the regulatory environment in India prevents the domestic pension funds to invest in VC and PE funds and the share of pension funds in the commitments in India has been from foreign pension funds.
University endowments in India are not very large that can allocate a portion of it to PE. Besides, universities in India are commonly set up as trusts and societies, and the regulations governing these institutions do not facilitate investment in VC and PE funds.
"Liberalisation of the regulations would result in inflow by domestic capital from these LPs," the report notes.
The analysis was based on a sample of 420 institutional limited partners (Lps) and their commitments to various funds raised between 1990 and 2014 excluding the infrastructure and real estate funds. While the sample size for the number of commitments was 940, commitment amount was available for only 148.
"Our results show that though domestic LPs commit (significantly) lesser amount per commitment as compared to foreign LPs at a ratio of 1:2.9, they make more number of commitments at a ratio of 1.33:1," says the study.
