MUMBAI: Global private equity funds, which poured tens of billions of dollars into India investments when the economy and currency were flying high a few years ago, may be stuck with those holdings much longer than planned as the rupee's plunge plays havoc with their exit options.
Returns on funds raised in dollars have shrunk with the currency's tumble to record lows, compounding the effects of a weak stock market and slowing growth, and threatening to further dampen private equity interest in Asia's third-largest economy.
"This has simply shaved off nearly a year's implied return," said Srinivas Chidambaram, managing director at Jacob Ballas Capital India, of the rupee's steep slide since August.
"The depreciation is clearly a matter of concern in the medium term as it impacts exit realisations and existing portfolios," he said. His company, an offshore fund backed by New York Life Insurance Co, manages $600 million in India.
The rupee is Asia's worst-performing currency over the past 12 months, shedding more than one-fifth of its value to hit a record low last Friday at 57.32 to the dollar. In November 2007, at the height of a boom in private equity investment, it marked a decade high of 39.03.
India has proven a tough market for global private equity companies once captivated by its growth potential.
Fierce competition for deals, few willing sellers, a regulatory ban on leverage and a fickle market for exits through IPOs meant many private equity firms have had to content themselves with minority stakes, often in listed companies.
KPMG figures $31.5 billion was invested in India by private equity funds during the boom period of 2006 to 2008, with less than 10 per cent of that having exited as of the end of 2011.
Typically, private equity investors look to sell off their investments in roughly five years.
"There is at least one year extra time required for portfolio companies to now deliver the returns," said Subbu Subramaniam, founding partner of M Cap Fund Advisors, which has invested in consumer products maker Jyothy Laboratories Ltd
and City Union Bank. In one boom-time deal whose paper loss has been exacerbated by the drop in the currency, U.S. private equity fund Warburg Pincus, one of the most active India investors, in August 2007 paid $98.5 million for a small stake in Indian engineering firm Punj Lloyd at 275 rupees a share.
Since then, the rupee is down 27 per cent and Punj Lloyd stock is down nearly 83 per cent, and the stake is worth just $12 million.
CAUGHT OFF-GUARD
The rupee has been under pressure as India's economy weakens and investors worry about a widening current account deficit. Ratings agencies Fitch and Standard & Poor's, citing fiscal policy woes and risks to growth, have cut their outlook on India's credit rating, threatening its investment grade status.
The Reserve Bank of India, which has stepped into the market to sell dollars, on Monday announced a rise in foreign investment limits in government bonds and other steps to bolster the rupee, but the currency drew little support as the market had hoped for more aggressive measures.
