It may well be a reality check for the Indian private equity industry. China is not only peaking in grabbing investor interest, with a majority of limited partners (LPs), investors in private equity funds, upping their commitments to the eastern giant y-o-y, but also consistently betting on the future returns from the market.
In 2011, China?s PE fund raising was a mammoth $16.616 billion compared to an ordinary $2.737 billion for India. And interestingly, this China investment overshadow story was scripted in 2011 as the fund raising gap between India and China widened like never before. In 2010, China managed to raise $7.509 billion compared to a decent $3.268 billion by India, as per the latest data by the US-based Emerging Markets Private Equity Association.
And this is not it. With policy paralysis, prolonged deliberations over AIF regulations, uncertainty around implementation of GAAR, the ever sliding rupee, retrospective amendments, dipping growth and disconcerting macro-economic scenario, all taking a toll on the investor expectations for future returns from India. However, global investors interest in China remains intact. The 2012 Global Limited Partners Survey by EMPA exhibits that a majority of investors have the highest net returns expectations for their Chinese 2011-vintage funds, with 76% expecting returns of 16% or more. Amongst the emerging economies, in LP expectations on returns, India ranks at the sixth position with just about 56% LPs expecting India to deliver 16% net returns.
?LPs are apprehensive about what is going on in India,? Rajesh Srivastava, CMD, Rabo Equity Advisors, pointed out. He added that the dipping growth rate, volatile market, prevailing uncertainty and depreciating rupee are having a negative impact on investments and on funds on road looking for a closure.
Even as India investment story is dipping, realised returns are also coming under a scanner, contrary to China. As per the KPMG report Returns from Indian Private Equityit is evident that a new cause for concern has arisen for Indian PE as India has fallen well behind China in exits. Exit value for China was $8.7 billion in 2010, nearly twice the exit value for India in 2010. Accordingly, comparing returns for India to its closest competitor China, returns for India lag behind on an overall basis as well as on a realised basis. The overall IRR for China being 20.4 % as compared to an IRR of 17.9 % for India. ?Global investors have put India on wait and watch mode. Foreign investors have been hit systematically in India and if this continues there will be a definite LP shift to other emerging economies,? cautioned Rahul Bhasin, managing partner, Baring Private Equity Partners. He added that over valuations and currency depreciation are making the case of investing in India hard compared to China.
Ravi C Adusumalli, general partner and head of India operations for SAIF Partners, explained that when China needed foreign capital in the 80s and 90s, it created enabling infrastructure to welcome foreign capital. ?The kind of capital India needs, it should be much more forthcoming in their approach and handling of foreign capital. Whether its tax, corruption or fear of the unknown, investors are getting jittery.? Adusumalli added that heightened valuations in India is a fundamental problem and as a result returns to the investors from India are lower than returns from China.
In a similar vein, Ajay Relan, founder and managing partner, CX Partners spelled that India seems to falter more quickly than China in growth and over valuations in the Indian market are also impacting returns. ?In India often private valuations have been as high as public valuations or even higher. Whereas in China, there is a big gap between private valuations and public valuations and public valuations are much higher than entry verticals of private companies.? Relan, however, reaffirmed that the biggest competitor for India is going to be China, ?has always been and will be.?