Private equity (PE) funds are emerging as a preferred investment option for the country’s wealthy individuals. More and more private equity funds in the country are now wooing high net worth individuals (HNIs) to raise money.

In 2008, Franklin Templeton Private Equity Strategy and TVS Shriram Growth Fund raised over Rs 1,100 crore predominantly from domestic HNIs.

“Indian high networth individuals, who were earlier focused on equity markets/funds, have become more open to explore alternative asset classes such as private equity,” said Vivek Kudva, managing director, Franklin Templeton (India).

This month, Milestone Capital formed a 50:50 joint venture with Religare Venture Capital, a unit of Religare Enterprises, for managing a Rs 600 crore private equity (PE) fund. This fund also aims to invest in high-growth Indian companies mainly in the healthcare and education sectors. “About 50-60 per cent of the funds will be raised from domestic HNIs,” said managing partner – private equity, Milestone Capital Rajesh Singhal, .

Last July, Chennai-based TVS Capital Funds and Shriram Group raised Rs 220 crore from Indian HNIs for its Rs 500-crore PE fund. The fund intends to make investments in mid-cap Indian companies from sectors like healthcare, private institutions of higher education, hospitality and specialty retail.

IDFC’s Hybrid Infrastructure Fund lowered the minimum investment limit to Rs 10 lakh against the usual ticket size of Rs 2-5 crore to attract more retail investors.

Vineet Dhar, business head, wealth management, ICICI, said that in the past 2-3 years, private equity fund industry in India has matured. “Normally, HNI investments constitute 4-5 per cent of the asset under management of PE funds in India,” he added.

PE funds are long-term investment options with tenures of over 8-10 years. “Good PE funds spend a lot of time in nurturing the investee company and thus the gestation period of such investments is long,” said Vikram Uttam Singh, head, PE advisory group of KPMG.

However, PE funds are high-risk investment options and proper due diligence is required before investing in them. “Investors must avoid funds managed by first-time managers,” Singh said. Most experts are of the view that PE investments should not exceed 10-12 per cent of an investor’s total portfolio.

On the return side, most private equity funds fixed the hurdle rate or the minimum acceptable rate of return at 12 per cent a year. On the higher side, it could go over 25 per cent. However, Sonu Bhasin, president, retail financial services, Axis Bank, said in the present market scenario, one should not expect more than 20 per cent returns.

“We were advising the HNIs who were looking for diversification to invest less than 10 per cent of their portfolio in private equity funds,” said Suresh Raju, executive director, of TVS Capital Funds.

The fund is looking for an internal return of 25 per cent in four years, he added.

Experts say HNIs who are looking to invest in these types of PE funds need to weigh their risk appetite given the long-term nature of the investment.

“While PE may be a riskier asset class, returns in the long term would be superior than companies listed on stock exchanges,” said Arun Natarajan, chief executive of Venture Intelligence, which tracks Indian private equity and venture capital deals.

Liquidity is another issue with PE funds. Unlike companies listed on the stock exchanges, exiting PE funds is not that easy.

Investors have to be ready to park their money for at least 2-3 years, said Singhal of Milestone Capital. “Exit typically happens when the fund liquidates some of its investments,” he said.

In case of TVS Capital’s PE fund, the minimum investment was Rs 25 lakh. “The fund received 15 per cent as upfront payment and the remaining in four installments,” said TVS’ Raju.