| MUMBAI, June 26
MUMBAI, June 26 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 s i nce 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 percent 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 percent and Punj Lloyd
stock is down nearly 83 percent, and the stake is worth just $12
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.
The sharp drop in the rupee late last year, and again since
March, caught companies, investors, and policymakers off-guard.
"The speed and magnitude have been significant. It adds to
the risk profile of our investments," said Devinjit Singh,
managing director of the India buyout fund at Washington-based
private equity giant Carlyle Group, which has invested
$800 million in India, according to its website.
The currency risk could dampen private equity investments in
India which, including venture capital deals and stakes in
listed companies, rebounded to $13.5 billion last year, up 64.3
percent from 2010, according to KPMG. The peak year for private
equity investment in India was 2007, at $14.1 billion.
Last year, exits were down 38 percent from a year earlier,
at $2.8 billion, the KPMG data showed.
"Most funds are not keen to exit their investments now,"
said Jacob Mathew, managing director of Mape Advisory Group, an
Indian investment bank that handles private equity deals.
Traders and economists expect the rupee to remain weak as
Europe's protracted debt crisis steers investors away from risky
assets and India's economy sputters at its slowest in nine
years, growing at 5.3 percent in the March quarter.
The tumble in the rupee comes on top of a slump in share
prices, with the main share index sliding 25 percent
last year, although it has recaptured some of those losses with
a gain of about 9 percent so far this year.
And while the outlook for protracted weakness will give many
investors pause, Mape Advisory Group's Mathew said it also makes
Indian assets attractively cheap.
"If the rupee remains at these levels, we will see more
fresh investments than exits," he said.