The super-rich are seeking to play private equity role

The super rich in the country are increasingly giving investments in private equity (PE) funds the pass and taking direct exposure to unlisted companies.

Going by wealth managers, more and more high networth individuals (HNIs) in the upper band of the spectrum are willing to take higher risks and focus investments into unlisted companies looking for capital and assistance.

“Families are looking at direct private equity investments,” says Richa Karpe, director - investments at Altamount Capital Management. “More families now say they want to go on a deal-by-deal basis rather than a fund. They want to understand the business before investing in it.”

The global recession, which eroded the returns of some PE funds, may have had a role to play in this, says Karpe.

The super rich are making known their interest in individual company investments to their wealth managers.

“There are clients who come back to us and say ‘sound us out if you have any opportunity in some specific industries’,” says Rajmohan Krishnan, senior vice-president at Kotak Wealth Management.

Asked if more people than earlier were using the direct investment route, Krishnan said, “Definitely yes.”

But who are these investors?

“These are people who have a networth of at least $15 million as only they would be comfortable looking at a ticket size upward of $1 million,” says Krishnan.
These deals vary between $1 million and about $15 million in a single investment, wealth managers say.

But private equity funds say the HNIs can provide only the initial level capital.

Rajesh Singhal, managing partner - private equity at Milestone Capital Advisors, says these investments may be in the range of Rs 60-100 crore in a single company and ultra HNIs who can source these transactions would be investing directly. “These would be in a company needing seed-stage investing rather than growth-stage capital as the investment requirement in seed-stage is not high.”

Not only is the ticket size of investments under PE funds lower than needed in a direct deal, but also in a fund you would get a flavour of 5-6 investments by investing half-a-million dollars, or around Rs 2.5 crore, and that too across sectors, says Krishnan.

“It’s a question of the kind of wealth they wish to invest,” says Karpe.

“Depending on the wallet size and ticket size, the ultra HNIs look at opportunities in private equity through a fund or direct investment into these entities. Not everybody is a mature or an evolved investor as few people are exposed to these opportunities, such as those who have been abroad, but a general investor is not,” says Krishnan.

The reason for shifting from PE funds to direct deals varies —- some have transaction fee at the back of their mind, while some are experienced HNIs who have purely graduated to the next level.

“In a fund, if they commit an amount, they have to pay 2% fee. The amount is not actually invested at one go. It gets invested over 3-4 years, but they have to pay a fee on the actual commitment. In a direct business, there is no fee paid till the investment is made,” says Karpe.

“Investors who are probably more evolved will go for direct investment into certain companies depending on the investment opportunities. Others would give it to a PE fund to manage their money as the ticket sizes are much lesser,” says Krishnan.

“There is some migration of ultra-HNI into super-HNI segment because of natural growth in economy and such clients may acquire the wherewithal to invest into single PE deals. This could be one possible reason for the increase in single PE deals from HNI investors,” says Hrishikesh Parandekar, CEO, Karvy Private Wealth.

The number of such deals has increased of late, says Parandekar. “Ultra-HNI investors were doing single PE deals much before investing into professional PE funds came into vogue. However, the scale of investing, both in single deals and into PE funds, has indeed increased in the recent years. As investors become more informed of the risks and possible returns from directly investing, this upward trend will continue into PE as an investment class,” he says.
Krishnan agrees. “These investments (direct PE deals) used to take place even earlier, but now it is catching up fast. And companies like us try to get these opportunities as we have a wide range of clientele,” says Krishnan.

But where do these deals come from? These deals may not necessarily come from the wealth managers alone. “Some companies come to us; some are suggested by clients. Some may be their own companies or they may be investors in these companies,” he says.

Most of the super rich, while zeroing in on an investment target, look for areas they are well-versed in.

“It is industry-specific,” says Krishnan. “They are comfortable with certain sectors, say IT, but may be not power. When you showcase an investment opportunity, they will go ahead only if they are comfortable with the industry.”

The reason may be that the HNI wants to handhold and be actively involved, say wealth managers.

“Not everybody would want to invest in a passive way. They are probably looking at incubating the company. They may be able to add value to the company only in the industries that they are comfortable with and understand. Target (investee) companies are also not looking at passive investors; they look at active investors, who can get them some relationships and areas where they can grow,” says Krishnan.

“For ultra-HNI business owners, investing in PE space is a way of diversifying from their single-stock ownership in their companies, something we are strong advocates of,” says Parandekar of Karvy Private Wealth.

“Unfortunately, most single-PE-deal investments by ultra-HNI and super-HNI business owners have been in companies in a space related to their own businesses, because that is a space they understand. Hence, from a pure risk diversification perspective, it doesn’t help much. The objective is purely to generate superior returns from a space they understand more.” says Parandekar.

Keeping in mind the risk involved, wealth managers suggest a cap on such investments. “We advise them not to put assets more than 20-30% in one opportunity or 3-4% of their networth,” says Krishnan.