Why Direct Investments By LPs Are On the Rise This is a global trend and has been growing in India too

We are seeing a lot of limited partners (LPs) today moving into direct investments. The direct deals, according to experts, offer access to companies' cap tables and come with zero management fees. Institutional and HNI (high net worth individual) LPs are both more comfortable participating directly in the private equity pipeline from early stage to pre-IPO today. Interestingly, this is a global trend and has been growing in India too.

There are many factors that are leading to this rise in India. "Limited partners' role in the traditional scheme of private equity and venture capital isn't as passive as it used to be. The primary driver of this trend is an attempt by LPs to boost returns, while also retaining greater control over their capital. Most LPs generally begin by co-investing in the initial rounds and then choose to invest directly in later rounds. This helps them garner greater experience in newer markets, sectors, and investment themes. LPs tend to get extra gains as they get more preferential management fees and carry on co-investment deals," said Vivek Soni, partner and national leader, Private Equity Services, Ernst & Young.

Further, success witnessed by some large LPs, especially the likes of GIC, Temasek, CPPIB, OMERs, ADIA, has strengthened this trend, he added. LPs like CPPIB and Temasek have invested over $20 billion in India to date.

"We need to be cognizant that private markets are a relatively new asset class compared to public markets. Public markets have readily available data, unlike private markets. I believe both these strategies go hand in hand, as being an LP to fund increases the top of the funnel by way of co-investment in portfolio companies. These evaluations would be conducted diligently by a professional fund management team that understands this space very well," said Rajat Khurana, senior vice president–private markets, Lighthouse Canton India

Investors, we spoke to, also say that as traditional asset classes like debt give lesser yields due to the regime we've seen over the last 3-4 years, the need to move to higher-yielding instruments has become a priority. "Further, thanks to the last 3 years, there have been a lot of returns that have come into the LPs' hands thanks to success in equity markets, and this surplus capital needs to be deployed somewhere. So they are experimenting with newer asset classes," said Rajeev Suri Managing Partner, Orios Venture Partners.

Catamaran, a diversified investment firm that manages the funds of Infosys founder Narayana Murthy and his family, believes in backing deserving entrepreneurs to build scalable businesses. "LPs like to make direct investments when they believe they can add value and play a meaningful role in the growth journey of the company. In addition, the experience of operating in a sector gives them an edge to identify startups/ideas which can have large outcomes," said Deepak Padaki, president, Catamaran.

Lastly, LPs become GPs when they see strategic value in their investments. Lakshmi Narayanan, managing partner, Patel Family Office explains how. "For instance, either a backward or upward integration of their supply chain. We have seen many family offices use this strategy to increase the value of their core business. Additionally, the LP believes he/she can add greater value and is willing to take on additional risk through a more active role in the investee's business (by taking a significant stake for a board seat etc."