The Covid-19 pandemic has taken a toll on fund raising by India-focussed private equity (PE) and venture capital (VC) funds, with the ability of limited partners (LPs) to do due diligence on general partners (GPs) and asset allocation of LPs' global portfolios taking a hit.
Fund raising in the June quarter dipped to $171 million, a 94 per cent decline over $2.75 billion raised last year. Fundraising in the first half of the year declined 71 per cent to $1.6 billion.
"PE, VC fund raising by India-focussed funds has been impacted primarily on account of the pandemic and its collateral affects on travel and the ability of LPs to do due diligence on GPs. This is not limited to India but is a global phenomenon as the dislocation in credit and equity markets has impacted asset allocation in global portfolios of LPs," said Vivek Soni, partner & national leader - private equity services, EY India.
LPs are cutting down on fresh commitments amid the expected dip in distributions as exits dry up, potential acceleration in capital calls, and rebalancing of asset allocation, said experts.
"The decision-making process for fundraising is on hold as LPs would rather wait for things to stabilise before allocating money to a fund," said Gopal Agrawal, co-head, investment banking, Edelweiss.
Fund raising typically takes four to six months -- from doing due diligence, signing of term sheets to raising capital.
"Private equity firms are busy focussing on existing portfolios, sorting out cash flow issues and funding needs. So, there has been little time to think about fresh fundraising proposals, except in cases where the due diligence has already materialised and terms sheets have been exchanged," Agrawal added.
GPs looking to raise capital are facing multiple challenges in the current environment, given the sharper focus on past track record of delivering returns to LPs and exits across cycles.
"First time GPs are finding it extremely difficult to get the attention of LPs who are extremely distracted by what's happening in their global portfolios.
GPs with less than 2-3 funds under their belt will find it extremely difficult to raise capital," Soni said.
The inability to meet the GPs in person and conduct due diligence is also getting in the way of firming up commitments from LPs. Only those GPs that have deep and longstanding relationships with LPs are in the reckoning, said experts. This is especially so when GPs want to showcase a differentiated strategy without the requisite prior experience.
"The post covid-19 world demands different investing strategies and single strategy GPs may find it difficult, especially when their experience has not been deeper than three funds," said Soni. "But how does a growth investor suddenly pivot to raising a special situations fund when they have no prior experience in special situations investing?"
The fundraising outlook in the second half of this year remains bleak. First-time managers and those without a track record of delivering returns to LPs may find the going tough.
Agrawal is hopeful that fundraising may kick off by September, led by investments in sectors such as BFSI, infrastructure and renewables.