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Jun 27, 2012, 08.39 AM IST
Global private equity funds, which poured tens of billions of dollars into India investments when the economy and currency were flying high a few years ago, may be stuck with those holdings much longer than planned as the rupee's plunge plays havoc with their exit options.
Returns on funds raised in dollars have shrunk with the currency's tumble to record lows, compounding the effects of a weak stock market and slowing growth, and threatening to further dampen private equity interest in Asia's third-largest economy.
"This has simply shaved off nearly a year's implied return," said Srinivas Chidambaram, managing director at Jacob Ballas Capital India, of the rupee's steep slide since August.
"The depreciation is clearly a matter of concern in the medium term as it impacts exit realisations and existing portfolios," he said. His company, an offshore fund backed by New York Life Insurance Co, manages USD 600 million in India.
The rupee is Asia's worst-performing currency over the past 12 months, shedding more than one-fifth of its value to hit a record low last Friday at 57.32 to the dollar. In November 2007, at the height of a boom in private equity investment, it marked a decade high of 39.03.
India has proven a tough market for global private equity companies once captivated by its growth potential.
Fierce competition for deals, few willing sellers, a regulatory ban on leverage and a fickle market for exits through IPOs meant many private equity firms have had to content themselves with minority stakes, often in listed companies.
KPMG figures USD 31.5 billion was invested in India by private equity funds during the boom period of 2006 to 2008, with less than 10% of that having exited as of the end of 2011.
Typically, private equity investors look to sell off their investments in roughly five years.
"There is at least one year extra time required for portfolio companies to now deliver the returns," said Subbu Subramaniam, founding partner of M Cap Fund Advisors, which has invested in consumer products maker Jyothy Laboratories Ltd
In one boom-time deal whose paper loss has been exacerbated by the drop in the currency, U.S. private equity fund Warburg Pincus
Since then, the rupee is down 27% and Punj Lloyd stock is down nearly 83%, and the stake is worth just USD 12 million.
The rupee has been under pressure as India's economy weakens and investors worry about a widening current account deficit. Ratings agencies Fitch and Standard & Poor's, citing fiscal policy woes and risks to growth, have cut their outlook on India's credit rating, threatening its investment grade status.
The Reserve Bank of India, which has stepped into the market to sell dollars, on Monday announced a rise in foreign investment limits in government bonds and other steps to bolster the rupee, but the currency drew little support as the market had hoped for more aggressive measures.
The sharp drop in the rupee late last year, and again since March, caught companies, investors, and policymakers off-guard.
"The speed and magnitude have been significant. It adds to the risk profile of our investments," said Devinjit Singh, managing director of the India buyout fund at Washington-based private equity giant Carlyle Group
The currency risk could dampen private equity investments in India which, including venture capital deals and stakes in listed companies, rebounded to USD 13.5 billion last year, up 64.3% from 2010, according to KPMG. The peak year for private equity investment in India was 2007, at USD 14.1 billion.
Last year, exits were down 38% from a year earlier, at USD 2.8 billion, the KPMG data showed.
"Most funds are not keen to exit their investments now," said Jacob Mathew, managing director of Mape Advisory Group, an Indian investment bank that handles private equity deals.
Traders and economists expect the rupee to remain weak as Europe's protracted debt crisis steers investors away from risky assets and India's economy sputters at its slowest in nine years, growing at 5.3% in the March quarter.
The tumble in the rupee comes on top of a slump in share prices, with the BSE Sensex sliding 25% last year, although it has recaptured some of those losses with a gain of about 9% so far this year.
And while the outlook for protracted weakness will give many investors pause, Mape Advisory Group's Mathew said it also makes Indian assets attractively cheap.
"If the rupee remains at these levels, we will see more fresh investments than exits," he said.
Tags: equity funds, dollars, rupee, Jyothy Laboratories, City Union Bank , Punj Lloyd, current account deficit
Jun 18 2013, 22:39
- in MARKET OUTLOOK
Jun 18 2013, 22:39
- in Business