With the rupee tanking against the dollar, private equity funds have seen their investment portfolios shrink anywhere between 15-30%. It’s a further dampener for an industry grappling with difficult exits and low internal rate of returns. Consider this: as the rupee plummeted from R45 in January to R53 in mid-December, investment portfolio value of funds took a straight blow of 20%.

Coupled with the prevailing gloomy macro-economic environment globally as well as in India, the biggest casualty was in PE exits, which fell steeply from 2010 levels. That year saw 110 exits worth $2502.14 million compared to 175 exits worth $4543.47 million in 2010.

?It’s a double whammy for funds,? says Darius Pandole, partner, New Silk Route Advisors. Pandole reasons that investments are made in rupees and returns have to be generated in dollars, which is hitting general partners (GPs) on both ends.

He adds that the overall investment portfolios of funds have depreciated in dollar terms. ?In short and medium term, this will lead to increased uncertainty resulting in heightened risk perception among investors, and will certainly impact future investments”.

Rajesh Srivastava, CMD, Rabo Equity Advisors, agrees that funds planning to go for exits will take the biggest hit. ?There will be a mismatch between the investment that LPs make in dollars and the returns GPs generate in rupees. When the returns have to be converted into dollars for the LPs, that’s where the story dampens. Couple that with hard to come by exits, and the picture suddenly appears gloomy”.

As per the recently released KPMG study ‘ Returns from Indian Private Equity ‘, exit value for China was $8.7 billion, nearly twice the exit value for India in 2010 and the overall IRR for China is 20.4% compared with an IRR of 17.9% for India. As per the Report, India also lags behind developed economies, such as Australia and Japan, both in terms of overall and realised returns, ranking sixth after the US, UK, Spain, France and China in terms of PE value.

Srivastava added that LPs are apprehensive about what is going on in India. ?Dipping growth rate, uncertainty, volatile market and depreciating rupee are all having negative impact not only on the future investment but also on funds that are on road and are looking for a closure.? However, comparing the IRR of India and China, Srivastava adds that in the last three years, there are very few investors who have not made good money in India. ?Investment climate in China has not been as smooth as it is made out to be. China has it’s own share of problems from transparency and repatriation.?

However, Rahul Bhasin, managing partner, Baring Private Equity Partners, says that overvaluation, currency depreciation, macro management of the country is making the case of investing in India hard compared to China. Juxtaposing India with China, Bhasin affirms that China has given better returns, sustained growth and all stakeholders have made money over the past five years.

?In spite of China’s problems, LPs have experienced that China delivers returns.? Bhasin cautions that foreign investors have been hit systematically in India and if this continues their will be a definite LP shift to other emerging economies.

?Global investors have put India on wait and watch mode till India gets it’s act together,? he says.

But industry insiders feel that this growing interest in other emerging markets such as Vietnam, Korea and Russia, maybe a short-term scenario.

Sanjiv Kaul, MD, ChrysCapital, is optimistic about India’s PE story. Kaul explains that events such as rupee depreciation are budgeted for at the time of investments and investment appetite typically do not get triggered by these events. In short term, rupee depreciation will make valuations more realistic. ?Despite the disconcerting macro-economic scenario, India is a growth story, second only to China,? Kaul sums up.