Private Equity in Indian Honeymoon gets over with Zombie Funds

The Indian Private Equity Industry was on a high for the past few years with a new PE fund being opened every few months by PE veterans.The global interest in the Indian economy had been very high given the growth potential.There was a lot of money waiting on the sidelines to take part in the Indian growth story.Most of the PE performance till then had been very good given a rising tide lifts all boats.However the recent year has not been that good.More than one PE manager has had to shutdown given the lack of funding while others have found it difficult to exit given the bad stock market conditions.

Some of the real estate PE funds that had been raised are sitting like zombies waiting for the investments to rise.In fact some of the PE funds are just vegetating on the yearly fees of 2% with almost no hope of getting the 20% performance fee given the sharp fall in valuations.The Private Equity Industry with its fancied salaries and bonuses now faces a severe test.Only the performing funds are getting money as Limited Partners are become more diligent about investments.

There has also been a souring of relations with promoters of companies having differences with PE investors and going to courts.Lilliput,Subiksha have made corporate governance again come to the top of the investor mind.

Another case is where a darling investment sector for PE funds like Microfinance has collapsed

Microfinance has become one of the hottest growth sectors in India attracting Private Equity Companies eager to take advantage of India’s Growth Story.A Number of For-Profit Microfinance Companies have grown exponentially in  recent times with funds raised from Foreign PE Firms.The Business Model of these Financial Intermediaries is highly profitable with 25-40% Interest Rates being charged from India’s Poor Population who don’t have access to credit facilities.Borrowing from Banks at 10-12% and lending at 25% gives a huge spread which more than covers the cost of operations in dealing with a huge number of very small borrowers in far flung areas.

Note SKS is now down almost 90% from its IPO prices

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