Retail participation in Private Equity

There has been a lot of press in recent times about the surge in retail participation in Private Equity in India. I recently got a call from my Relationship Manager at my bank who wanted to check if I would be interested in investing (a minimum of INR 1 Million) into a Private Equity fund floated by a reputed business house. What was shocking was the complete lack of knowledge about the product, the risks it posed and the liquidity window for the fund. He kept insisting that my investments would grow at about 25% every year and I could pull out the money after 5 years. There was pretty much little else he knew - nothing about how NAVs would be calculated and how frequently, and what would be modus operandi for providing liquidity, what type of companies would be invested into and how would they be monitored and how would the carry be shared with the GP (was the hurdle rate 10% at an individual deal level or at a collective fund level).

I did find out that he was getting incentivized 2% of the money raised as his commission. Apparently with mutual fund commissions having dried up (because of SEBI's ruling), there are a lot of banks that are peddling these products to almost anyone and everyone.

Hmm... this got me thinking about the great ULIP scam in the earlier part of this decade. Every bank (under the garb of bancassurance) sold unwitting customers an investment cum life insurance product called ULIP which was, guess what, intended to make everyone (except for the customer) happy. With an administrative fee that ranged from 30-60% on the first year premium (half of which rolled back to the banker as incentive) and a steady trail of 8-10%, it sure did make money - but not for the customer. I must have been one of the biggest suckers - for inspite of being a retail banker, I got sold this product by one of my fellow bankers who promptly quit (after collecting his big, fat bonus). The worst part of it was that I could not surrender the product for 3 years because of a lock-in clause - so I had to throw good money after bad money, to get some of the good money back.





Cutting back to the chase, I am not against improving retail participation in Private Equity funds. But I am against it first time investors investing into first time funds without understanding the risks and the time horizon associated with it. To top it all, there is no one to regulate this - I am not sure if this falls under the purview of SEBI. I feel strongly that there ought to be a strong regulation to improve disclosures and ensure that there exists a certain level of mandatory disclosures upfront and on an ongoing basis before investors can plonk down their money.

Investing into Private Equity is far far riskier than investing into a listed stock or even into a close ended mutual fund (where one can cut one's losses and pull out the money should things go wrong) and one has the ability to monitor NAV's at regular intervals of time. Putting money into a blackbox which promises a high return.

This presents more than ever a case for a "smart intermediary" like a mutual fund - who can pool in the capital and add the smartness that is ever so required. This is critical when there are already increasingly strident voices from the existing LPs on making money in India.

Would love to hear other's views on this...

~Varadha
(varadha.r1@gmail.com)