What a difference a decade can make! Since the publication of our first report, "Navigating India: Lessons for Foreign Investors," in 2013, India has undergone a remarkable transformation. The country’s population grew by 100 million. Fuelled by improved connectivity and digital infrastructure, the number of internet users has soared, with more than half of its citizens now connected to the internet—a significant increase from the mere 12 per cent recorded in 2013. India’s GDP has more than doubled, rising from US$1.8 trillion in 2013 to US$3.7 trillion in 2023, underscoring the nation’s robust growth trajectory. Per capita income has also improved, reaching US$2,450 in 2023 compared to US$1,400 in 2013.
The Indian government’s ambitious programme of regulatory reforms, aimed at making the country an attractive option for international investors, is clearly bearing fruit. In the World Bank's 2020 "Ease of Doing Business" report, India rose to the 63rd position out of 190 countries, marking a significant improvement from its 134th place in 2013. In this compendium, we highlight opportunities for foreign investors and discuss some of challenges India faces today.
India is committed to achieving net-zero by 2070 and is pressing ahead with legislative reforms and investment into energy transition on an unprecedented scale, with renewables at the heart of this drive. India has the potential to increase its renewable energy production vastly—whether in solar, wind, hydro, hydrogen, or other forms of renewables—and it is making various incentives available in order to accelerate that process. Legislation and new schemes should make the country even more attractive to investors, and the efforts are already paying off with a significant number of large investments already being committed.
Technology is another growth sector. Several multibillion-dollar deals by companies such as Amazon and Apple emphasise the potential of the technology economy. Meanwhile, in infrastructure the introduction of products such as infrastructure investment trusts and real estate investment trusts make investment by foreign companies more attractive.
However successful an investment, there will come a time when an investor wishes to exit. In this issue, we examine two ways of exiting Indian investments: through general partner-led secondary transactions, and through the public market. Investors wishing to exit need to plan ahead and put the necessary protections in their documentation at an early stage to avoid potential pitfalls down the track.
India has also made significant strides in reforming its alternative dispute resolution (ADR) framework, aiming to position itself as a global hub for international arbitration. The 2021 Mediation Bill is another progressive step in making commercial disputes easier to handle, and the supportive stance of Indian courts has amplified positive effects of the legislative reforms.
Investing in India has never been more attractive for foreign investors, and we hope you will find this issue an insightful read.
Against a challenging macro-economic environment worldwide, India has proven resilient and demonstrated its huge potential for growth. With an increasingly favourable regulatory regime and greater avenues of investment, India’s attractiveness as a global market for investors will only continue.
India stands out globally as a market with strong growth in IPO volume, thanks to its dynamic regulatory framework, robust domestic capital market and a large retail investor base. IPOs are also gaining popularity among foreign investors as one of the available exit options from their investments.
The Indian government is pressing ahead with legislative reforms and investments on an unprecedented scale in the energy transition.
The market for private equity-led secondary transactions is growing, and India is steadily catching up with the global trend in embracing these innovative exit strategies.
In the past decade, India has made significant strides in reforming its alternative dispute resolution (ADR) framework, aiming to position itself as a global hub for international arbitration. The supportive stance of Indian courts towards arbitration has amplified the positive effects of these reforms.
The market for private equity-led secondary transactions is growing, and India is steadily catching up with the global trend in embracing these innovative exit strategies.
The popularity of single-asset transactions is justified by several benefits they offer to both GPs and the LPs in the primary fund: The GP can hold ‘high conviction assets’ for longer periods, while LPs have the ability to cash out and lock in returns early
In India, one increasingly popular method for exiting investments involves a secondary transaction led by a general partner (GP) in a single-asset transaction. This represents a departure from the traditional use of secondary transactions. Historically, secondaries transactions were used as means of providing liquidity to otherwise illiquid interests held by limited partners (LPs) in private funds, in which buyers would purchase the fund interest—or a portfolio of fund interests—held by LPs.
The use of the secondaries market by GPs was limited primarily to fund restructurings, involving the sale of all or multiple assets held by the fund. However, over time, single-asset transactions, involving the sale of a specific asset held by the fund to a new fund managed by the same GP—a 'continuation fund'—in GP-led secondaries have become increasingly common, to the point that such single-asset transactions now form a majority of all GP-led secondaries.
The popularity of single-asset transactions is justified by several benefits they offer to both GPs and the LPs in the primary fund. The GP can hold 'high conviction assets' for longer periods, which may exceed the typical ten-year fund life.
Concentration limits and other guardrails in the primary fund may restrict follow-on investments in the asset, whereas similar restrictions do not apply in the case of single-asset continuation funds. In contrast, LPs in the continuation fund are often required to make additional unfunded commitments beyond the acquisition price of the asset.
LPs have the ability to cash out and lock in returns early, while, in most cases, also having an option to roll over, either fully or partially, into the continuation fund. GPs have the benefit of being able to make distributions, and crystallise carried interest, without reducing assets under management.
However, potential conflicts of interest in such GP-led secondaries require careful examination and mitigation as the GP controls both sides of the transaction. Typical mitigation measures include, depending on the transaction, obtaining third-party valuation reports and fairness opinions, and robust processes ensuring parity of information between LPs of the primary fund and the continuation fund.
In most cases, such transactions are implemented with LP Advisory Committee consent or consultation, and fund documentation for recently formed funds often include specific provisions governing transactions involving the use of continuation funds.
48%
In 2022, GP-led secondaries comprised approximately 48 per cent of the global secondaries market by transaction volume
Source: Jefferies
In addition to LPs of the primary fund, co-investors who participate in the investment alongside the primary fund are also stakeholders in exits to continuation funds. While in several single-asset transactions, co-investors have been offered the option to exit along with the LPs of the primary fund on the same terms, this is not always the case.
Co-investment documentation typically provides co-sale or tag-along rights for the co-investors to exit on the same terms as the primary fund in an exit event, but transfers to 'affiliates' of the primary fund—typically defined broadly to include funds managed by the same GP—are carved out from the scope of such co-sale or tag rights. Therefore, co-investors may be at risk of being exposed to an 'evergreen' structure.
Lately, some institutional investors participating in co-invests in India have been seeking additional exit rights in such scenarios involving transfers to continuation funds, although a clear trend is yet to emerge in this regard.
Complexities often arise in addressing situations involving partial transfers, where the primary fund continues to retain a portion of its investment.
Additionally, in 'fund-style' co-invest arrangements, where co-investors often have limited information rights, co- investors have also asked for additional protections needed to ensure information and disclosures to co-investors are symmetrical to those provided to LPs of the primary fund and the continuation fund to ensure their ability to take informed decisions on participation in such 'exit.' Similar issues may also be faced by minority shareholders of underlying portfolio companies as well, since co-sale and tag-along rights in shareholders' agreements at the portfolio company level also typically exclude transfers to 'affiliates' of the primary fund—including other funds managed by the same GP.
The size of the secondaries market has grown rapidly, and the volume of GP-led transactions has grown even more rapidly during this period. In 2022, GP-led secondaries comprised approximately 48 per cent of the global secondaries market by transaction volume, according to Jefferies.
While the secondaries market in India is relatively undeveloped still, there have been several single-asset GP-led secondaries involving Indian assets in recent years—including some cases where the primary fund held minority positions in the portfolio company. Despite global macroeconomic headwinds, the continuing demand for Indian assets and the relatively strong performance of Indian capital markets has ensured that third-party exits, through public markets or private transactions, continue to be available, and even preferred.
However, if high interest rates continue to persist and credit markets remain difficult to access, third-party exits may become more challenging, and the possibility of a growing need for alternative liquidity solutions in the near to medium term cannot be ruled out, especially considering the elevated investment activity in the past two to three years.
In any event, as the market continues to mature, there are likely to be a greater number of single-asset GP-led secondaries involving Indian portfolio companies. Institutional investors who are active participants in co-invests involving Indian assets and minority investors in such portfolio companies may also increasingly seek rights and protections in their documentation to avoid potential exit hurdles in the future. It will be important to develop an appropriate framework in this regard that protects the interests of both the GP and co-investors.
In addition, onshore private funds in India may also consider gearing their fund documents to allow flexibility to undertake GP-led secondaries and develop policies to address conflicts of interest in such transactions. The Institutional Limited Partners Association issued new guidance on continuation funds in May 2023 to help manage this process.
At the same time, GP-led secondaries are under increasing scrutiny by regulators around the world. In May 2023, the US Securities and Exchange Commission (SEC) adopted amendments to quarterly reporting requirements of systemic risks by US-registered investment advisors to include "adviser-led secondary transactions." More recently, in August 2023, the SEC also adopted new rules—yet to come into force—which, among other things, provide additional guardrails on adviser-led secondary transactions that may be undertaken by US-registered investment advisers in their US funds.
While Indian regulators are yet to specifically address governance and conflicts issues concerning secondaries transactions involving onshore funds, regulatory changes in other markets may provide an indication on the approach that could be adopted in the future as this type of exit continues to grow in popularity.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2023 White & Case LLP
View full image: GP-led annual transaction volume (US$ billion) (PDF)
