With the free fall of the rupee against the dollar, private equity funds are not only witnessing a shrinking investment portfolio, but their returns on investments are also taking a hit, making the exit scenario gloomy. Since investments are made in rupees and returns have to be generated in dollars, the India return story will most certainly be impacted further. For the record, rupee plummeted to a record low of 54.49 against the dollar on Wednesday. The rupee has been falling steadily against the greenback since January 2011 when it was hovering at around R45 against the dollar.
Mayank Rastogi, partner, private equity and transaction advisory services, Ernst & Young pointed out that such depreciation do not bode well from an exit perspective.
?For a late 2007 to early 2008 investment that was made at the rate of R40 to a dollar, exit at R54 for a dollar translates into a straight 25%-plus depreciation in the investment in dollar terms. Considering this, even if the investment may have grown in rupee terms, it may still end up yielding negative returns or much lower returns in dollars making the exit decision difficult for General Partners (GPs).?
It’s a further dampener for an industry grappling with difficult exits and low internal rate of returns. April proved a lacklustre for PE exits with just seven exits recorded during the month aggregating to $49 million in exit value, as per VCCEdge data. Mahendra Swarup, president, Indian Venture Capital Association (IVCA), said, ?Some of the funds will not be able reach the hurdle rate. Who will exit an investment at R54 that was made at R42 in 2009? Since limited partners (LPs) make investments in dollars and GPs generate returns in rupees, there will be a mismatch. ?
Swarup added that this would further depress the fund raising sentiment with limited partners weighing IRR of India vis-a-vis China and Brazil, for committing fresh money. As per the KPMG study, China is delivering overall IRR of 20.4% compared with an IRR of 17.9% for India. India is also lagging behind 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.
Ajay Relan, founder, CX Partners, said that rupee depreciation wipes off 15-20% of the portfolio, but how can one factor in such eventualities. ?As an investor you can pick the best businesses, and no matter how good you are, there is nothing you can do about rupee deprecation of this magnitude. If things continue in this fashion, investors will shy away from putting money into India.?
Although, prima facie the only silver lining to the rupee story may well come with a rider. PE firms should be able to get a bigger stake for the same amount of dollars. However Rastogi cautioned, ?Investments involve long-term and time consuming evaluations and the rupee movement may not have an immediate positive impact on the activity. It may help investors who were closer to making a decision but not the ones who are at preliminary stage of evaluating an investment.?
