A Conversation With: Robert van Zwieten, C.E.O. of Emerging Markets Private Equity Association Uncertainty around the economic and regulatory climate in India this year has weighed heavily on foreign investors, who are exercising caution in committing fresh capital to India-focused private equity funds. According to data from the Emerging Markets Private Equity Association in Washington, D.C., the Indian private equity industry's fund-raising in the quarter that ended in September fell 55 percent compared to the same period a year earlier, even while their investments in companies rose 16 percent. In an email interview, India Ink asked Robert van Zwieten, president and C.E.O. of the association, which representsinstitutional investors and private equity fund managers across developing and developed markets, about the outlook for investor appetite in Indian private equity in the coming year. Previously, as a senior official with the Asian Development Bank, Mr. van Zwieten was responsible for the origination and structuring of $2.5 billion in investments across a range of Asian emerging markets. How would you describe investor sentiment toward India at the moment? Has the "India story" dimmed as a result of a weaker economic outlook for the country and the prospect of a renewal in global monetary tightening? We recently saw India fall to ninth place, out of 10, in attractiveness for emerging markets private equity investment in our annual Global Limited Partners Survey. It heldfifth place only two years prior. While the macroeconomic "India story" has dimmed for the time being, the private equity story focused on value creation remains. Private equity firms, especially those with specific sector expertise, can still find many opportunities to make good investments and foster growth through operational improvements. Firms with a short-term outlook who were looking simply to ride a wave of rising macroeconomic factors and lofty expectations will not survive. While investor sentiment is on the decline and fund managers are facing a challenging fundraising environment, those managers fortunate to raise funds will benefit from lower competition and better valuations as the market consolidates. We are already seeing this as India attracted more investments than any other emerging market country through the first three quarters of 2013. Regulation reforms and a rebound in the rupee should improve investor sentiment as the country still has promising growth fundamentals. It is estimated that around 80 percent of private equity capital in India still comes in from foreign investors. Can we anticipate seeing more domestic capital being allocated to the industry in the near future? While there has been some participation in private equity by domestic financial institutions and high net worth individuals in India, it has been limited, and greater reforms, including those focused on the country's pension funds, would have significant potential in making the industry more competitive. We have seen the introduction of domestic institutional investors committing capital to homegrown firms to be a significant catalyst in developing local private equity industries. For example, several Latin American markets, such as Brazil, Mexico and Colombia, have attracted increasing numbers of foreign investors by opening up the asset class to their domestic institutions. Having local investors would also mitigate some currency risk issues for fund managers. In fact, in the first half of 2013, two funds achieving closes in India were raised in local currency and three the year before. Going forward, more managers may turn to INR [Indian rupee] fundraising to insulate themselves from currency risk. There's increasing demand from local investors too: While new fund manager Kedaara Capital's USD vehicle closed this October, local demand prompted them to open a rupee vehicle to invest alongside the USD fund. Most Indian investors raise funds in dollars to invest in rupee-denominated assets. Given the deep exposure to currency risk, how badly will funds and foreign investors be impacted by the rupee's decline this year? Private equity has a long-term investment cycle, so the most lasting impact of this year's decline in the rupee will be on investor confidence, since the industry is having a hard time providing the returns that were promised. We are already seeing the impact of this on the fund-raising trail. It will be a tough sell to get investors to look beyond past performance and current problems, especially when there are other Asian markets attracting positive attention. More than 60 percent of private equity commitments over the past decade went to 2005-2008 vintage funds, which invested at the peak of the market. But exits have been scarce. What are funds doing to generate liquidity for investors stuck with unrealized losses? It's true that the private equity industry in India, similar to several other emerging markets, has been plagued by a challenging exit environment of late. Nonetheless, the types of exits taking place in India today have increased over the last five years, and we are seeing greater diversity in exit strategies. Whereas I.P.O."s dominated the landscape in the mid-2000s, when the market hit its peak, we have since seen an emergence of trade/strategic sales and secondaries. In particular, there has been a surge in private equity firms selling their stakes to peers that are either looking to enter the Indian market or seeking to capitalize on the value creation measures already in place and take a business to the next stage of development. In addition, as India's public markets regained some momentum in 2013, P.E. [private equity] firms have also been able to opportunistically sell shares in their publically listed companies. Do you anticipate a difficult environment for Indian private equity, with more room for consolidation? Fund-raising will remain challenging for Indian funds and further consolidation is likely, but new fund managers will also emerge who can navigate the challenges and make a name for themselves specializing in certain sectors or strategies. India had a relatively nascent private equity market that probably grew too quickly and now will correct itself. There is a lot of highly educated and experienced local and international talent to implement the changes needed to correct course and be successful. Two success stories from the challenging 2013 fund-raising trail include Kedaara Capital's final close at $540 million and Tata Capital at $600 million. So while consolidation will occur, skilled managers will flourish, as has happened in other markets that have survived the growing pains of developing private equity industries. What measures must the Indian government take to encourage long-term capital and compete favorably with other emerging market investor destinations? Political and regulatory uncertainty has undoubtedly had a negative impact on the Indian private equity industry. Worries that the government might re-evaluate tax treatment policies on a retrospective basis, is one major example of investor concern. Investors need to believe there is long-term consistency in a government's policies, to commit long-term, patient capital. India is taking steps in the right direction though, with the Companies Bill, intended to reform India's business environment, and the issuance of regulations for alternative investment funds seeking to provide greater clarity and transparency for the industry. Rakesh Mani is a columnist and writer, focused on Asian economic policy and development issues. Follow him on Twitter: @rakeshmani