With the RBI allowing individuals to invest up to $50,000 in overseas investments per financial year, a new avenue to send your money to work abroad has opened up.
Even as fund of funds (FoF) are struggling to find a foot-hold in the Indian mutual fund industry, a more exciting variant is making news in the HNI market — a private equity FoF.
Some foreign banks are offering a fund of private equity funds. Such a fund will spread risks by investing across a number of new and existing PE funds across geographies and investment styles. There are also variants like multi-manager PE funds in which each manager is given a proportion of the fund to invest in a particular geography or sector, thus helping investor achieve multiple objectives of international diversification, expertise of different managers and higher risk- adjusted returns.
Private equity refers to the form of investing where funds invest in private companies and real estate. Private equity funds not only invest money, but also take part in the management of the company they invest in. They normally pick their companies in industries where they have some experience already.
By helping the company through managerial inputs and their connections across the world, they engineer faster earnings growth for the company. One of the famous and most recent examples in the Indian context is the Bharti Airtel. Warburg Pincus, a global fund which had invested in Bharti when it was still a small time start-up, saw the company grow into a multi-billion dollar enterprise and sold its stake in a $1.6 billion deal in 2005.
Since PE funds typically stay invested in a company for 3-10 years, investors in these private equity FoFs should be ready to lock in funds for longer periods. For example, a PE fund-of-fund, which recently closed for subscription, wanted investors to commit for a period of 12 years.
Just as the tenor is long, the ticket size – the minimum sum of money that needs to be invested — is also fairly large. The scheme mentioned above would not take in less than $2,00,000. Though this is beyond the limit allowed by RBI, a family of four can together invest in this fund as each individual is allowed to put in up to $50,000.
Returns are received in the form of dividends which start coming in towards the middle of the term. Returns are conservatively placed at around 15-20%. But PE funds more often than not, deliver more.
Source : DNA India