Retail participants have provided relief to private equity (PE) players raising funds.
In particular, new funds such Reliance Private Equity and Aditya Birla Private Equity have been successful in raising money domestically, especially from retail investors.
“We have seen a surge in retail participation. This segment has huge potential and has not been tapped extensively,” said Reliance Private Equity Group President Ramesh Venkat. In another 12 months, Venkat expects around Rs 2,500- 3,000 crore to come from the retail segment. He, however, refused to share the contribution made by retail investors for the first fund being raised by Reliance.
The head of a PE firm which is in the process of raising a fund said nearly 50 per cent of the commitment received so far was from high networth individuals (HNIs).
The model works something like this. Banks make the first pitch to HNIs. Subsequently, PE players make presentations and explain the new asset class. In recent months, they have been indicating returns of around 25 per cent.
The drawdown of funds differs in case of institutional and retail investors. Generally, limited partners commit the fund value and PE firms close the fund. They draw the resources at the time of investment. While HNIs pay around 15-20 per cent of money upfront, and the remaining comes later, though not necessarily at the time of investment.
“We tap HNIs who have wide range of investment with deeper commitment,” added Venkat.
“Depending on their respective investment strategies, the funds approach HNIs and/ or institutional investors. The differentiation and focus of the fund must appeal to HNIs for them to consider investment,” said Aditya Birla Private Equity Managing Director and Chief Executive Officer Bharat Banka.
But PE players said future participation by retail investors would depend on the performance of the fund already raised.
Sensing an opportunity, banks have also devised ways to tap the segment at a time when funds are finding it tough to achieve closure. Over the last 15 months, several Indian players who wanted to set up funds have faced difficulty in raising resources, prompting them to either lower their ambition or go slow on fund-raising.
Deutsche Bank has divided its wealth management division into two. Customers with an investible corpus of over Rs 5 lakh to Rs 4.5 crore are dealt separately, while there is a separate team for the ultra-HNIs (those with an investible surplus of over Rs 4.5 crore). The former segment is called mass affluent.
The head of a wealth management services provider for the mass affluent said there had been a lot of interest from this segment to invest in PE funds. “People have booked profits in equity at current levels. They ask us for new avenues to put in their money,” said Pankaj Narain, head of private clients, banking and investment at Deutsche Bank.
But he also points out that this segment does not want to put in large amounts in the PE business. “Many of them are first timers,” he added.
So, the bank and others like it have started negotiating with PE players to lower the entry level. At present, the threshold for most players is Rs 25 lakh.
“Our clients start with Rs 10 lakh and then, the decision is theirs if they want to increase their exposure to the fund,” said Narain.
Bankers said most of the funds were willing to accept their terms as it helped them speed up the acquisition of limited partners. In fact, when IndiaReit had lowered the investment barrier from Rs 25 lakh to Rs 10 lakh for its real estate PE fund, the fund house saw investors from far off places such as Shillong putting money in their scheme, said a banker.
But PE players said that there was still a long way to go for the product to become mass market. “Indian retail investors have participated in PE funds in a big way in the last 24 months. However, significant efforts to educate retail participants about the nature of this business are imperative,” said IL&FS Investment Managers Executive Director Archana Higorani.
For instance, PE players say that there is a lack of awareness among retail investors about the long-term nature of the business, since these are close-ended funds with a life of four to six years. By definition, they are not easily tradable.
