The sharp depreciation of Indian rupee against the US dollar since 2007 has seen nearly $4 billion being wiped off the investment portfolio of private equity (PE) firms which bought stakes in Indian companies around that time, but later found few profitable exit options to liquidate investments and return capital.
As per Venture Intelligence data, PE companies invested $14.65 billion in India in 2007 — the highest in a single year ever. Yet, they have exited barely 26% of that portfolio, quite low by PE industry standards. In other words, investments to the tune of $11 billion made in 2007 is yet to be realised and returned to investors.
In calendar year 2007, the average exchange rate of the rupee against the dollar stood at R41.33 versus R62.59 in 2015. From January 2007 to now, the rupee has depreciated over 34% against the dollar. This has led to a value erosion, on currency basis, of $3.67 billion for private equity investments in 2007 alone. That means unless the portfolio companies have done very well, the PEs can’t give decent returns to the investors.
“Private equity fund managers are sitting on a significant amount of exchange loss already, and the performance of portfolio companies will have to make up for it, “ noted Sanjeev Krishan, leader of PE practice at PricewaterhouseCoopers. “None of the PE firms had factored in such steep rupee depreciation and so returns will be significantly hit,” said a director of a private equity firm.
To cite an instance, PE players including Goldman Sachs, Temasek, Macquarie and KKR invested around $1.2 billion in Bharti Infratel (see table). While Goldman Sachs completely sold its stake in Bharti Infratel in March 2014 generating a return multiple of just 1x to investors, Temasek has partially exited the company by offloading its stake in tranches between December 2012 and December 2014 giving returns of 1x to 1.2x to investors. Carlyle completely exited its holding in HDFC in October 2012 at a return multiple of 2.1x.
A lot of PE firms tend to remain invested in portfolio companies for a period of five to eight years and exit these investments at a premium — typically seeking an average return on investment of over 25% — at the end of this tenure. Currency depreciation, along with high entry valuation of companies in 2007, coupled with macroeconomic challenges over the past seven years, have collectively led to relatively low returns to PE investors.
The Indian economy was buoyant during mid-2006 to 2008 before the collapse of US investment bank Lehman Brothers in September 2008 triggered a global financial crisis and sent the global economy into a tailspin. Several other factors like challenges in the domestic economy and an economic crisis in the euro zone made it challenging for PE firms to exit their investments due to subdued valuations.
While the period between 2000-13 saw investments by PE firms in the domestic market increase, the returns have been below benchmark levels and in fact on a southward journey. For instance, during this period there were cumulative investments of around $94 billion, of which exits in cost terms was valued at $18.3 billion. This yielded a return of $30.3 billion, which is just 1.7x of the original investment.
Vishakha Mulye, managing director and chief executive of ICICI Venture Funds observed, “Most of the time you may find investors saying that they have not seen much returns from India. They have always been convinced that there are opportunities in India, but they are not sure whether the opportunity is real and whether they will make money”.