Funds are consistently reporting below-average returns for past decade.
While the period between 2000-13 saw investments by private equity firms in the domestic market increase, the returns have been below benchmark levels and, in fact, on a southward journey. For instance, this 13-year period saw cumulative investments of around $94 billion, of which exits in cost terms were of $18.3 billion — which at 1.7 times gave a return of $30.3 billion in value terms.
Vivek Pandit, director of private equity practice at McKinsey & Company, said PE funds in India have performed short of benchmarks in the past few years, leading to sharp decline in returns. “Funds that invested between 2006-2009 yielded 7% returns at exit, below public markets’ average returns of 12%,” Pandit said.
As per data analysed by McKinsey, investments increased from $1.5 billion in 2004 to $4.6 billion in 2009, yet gross returns to investors decreased from 45% to 2% during the same period.
Vishakha Mulye, managing director and chief executive of ICICI Venture Funds, said, “Most times 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”.
Meanwhile, as per McKinsey data, the quantum of funds available for investment to PE fund managers increased from $0.1 billion in 2004 to $22.5 billion in 2009.
“With excess capital in hand, general partners increased transaction sizes and invested in a range of sectors, many of them capital-intensive, relatively illiquid and requiring longer times to exit. As a result, returns have been hurt, exits have been scarce,” added Pandit.
This led PE firms’ investment mix to increasingly shift allocation towards the infrastructure industry in sectors like power generation, engineering, construction and real estate, and subsequently the average holding period of the investment increased from 3.5 years in 2004 to 5.2 years in 2013.
According to McKinsey, between 2000 and 2008, PE firms invested $9.8 billion in the real estate sector, $5.9 billion in information technology and $2.8 billion in the consumer goods sector. During the same period, real estate investments yielded 2%, in comparison with 21% returns from investments in the information technology sector and 18% returns from investments in consumer goods sector.
Lacklustre exit opportunities have made it challenging for PE firms to realise investments and return capital to limited partners.
Amit Bhagat, managing director and chief executive of real estate-focused PE firm ASK Property Investment Advisors, says a lot of PE money went into long-gestation projects like retail malls, townships and property investments in tier II and III cities between 2005 and 2008.
“PE funds are looking to sell their stakes in such projects back to the developers, but in some cases the latter are not keen,” Bhagat said.