Rupee’s slide past 90 may complicate PE exits, tighten return thresholds for global investors

Rupee depreciation

The rupee’s breach of the 90-per-dollar mark on December 3, its weakest level on record against the greenback, has sharpened concerns among private equity investors, particularly foreign funds preparing for near-term exits through IPOs and secondary share sales.

Industry experts said that the swift depreciation risks distortions in valuation expectations, dragging dollar returns and pushing some investors to delay monetisation plans.

A moderate level of rupee depreciation is typically factored into PE return models, but this year’s nearly five percent slide is much steeper and faster than expected.

“PE (private equity) funds, especially overseas guys, are at a loss. This depreciation hits their investments. They are never happy with such level of depreciation,” said a Mumbai-based investment banker. “For investors exiting through IPOs in the near term, it will definitely impact their exit values and return metrics.”

Also read: Uday Kotak warns businesses as rupee breaches Rs 90-mark: 'Time to shake out of comfort zone'

To be sure, while the rupee depreciation is a near-term concern, experts believe that it won't be a dent for the long-term India story, from a PE perspective. But such a depreciation may force investors to relook at their calculations for risk-adjusted returns, they added.

Vivek Soni, Partner and National Leader, Private Equity Services at EY India, said PE funds generally target 20–25 percent IRRs (internal rate of returns) or more, and a nominally incremental currency depreciation assumption may not materially damage the model.

“If they have to factor in 100–150 bps of additional currency depreciation than what they did in the past, I don’t think it will be a big hit or a deal breaker for the India story. But I think they will be a lot more careful when looking at new deals than before, so that they can make the requisite risk-adjusted returns,” he said.

“It will definitely raise the bar, if they have to raise their base case assumption for currency depreciation during their investment hold period.”

Bankers added that current volatility specifically complicates exits because valuation floors set in rupees translate into lower dollar realisations. “PE guys don’t operate on the short term…They will build this into their exit calculations, but such a sharp depreciation is not something that one accounts for,” the banker cited above added.

While some large funds use currency hedges, they are rarely comprehensive. “The bigger ones do hedge but people don’t necessarily hedge the entire amount. You can hedge when your exit timeline is fixed, but PE exit timelines are usually uncertain,” he said.

The rupee weakness could also shift competitive dynamics within Indian deal-making when it comes to Indian GPs (general partners) raising capital.

“Domestic capital commitments to Indian GPs' ask for returns in INR, as such, will become more attractive for GPs,” Soni noted.

He added that a favourable India–US trade deal could help reverse the current sentiment on the rupee.

“If the trade deal gets signed and India is largely able to protect its interests, the rupee may appreciate as US-headquartered sources of capital may feel more comfortable to increase their India exposure again, helping the rupee,” he said.

On the investment side, the weaker rupee makes new deals cheaper in dollar terms, though funds are expected to be more selective until the currency volatility stabilises.