September 2013
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PE investments in 630 companies waiting in exit queue, but bleak economy and muted stock markets spoil plans

Atul Nishar, founder of Hexaware Technologies, has been planning an exit for private equity investor General Atlantic for at least 12 months now. The PE fund’s Rs 300-crore investment made at Rs 142 a share seven years ago is now trading at Rs 118 a share. “Whenever GA wants to sell its stake, we will help find a suitable PE fund to buy it,” says Nishar. Bankers were appointed a while ago to squeeze out an exit. A secondary offer was considered, so was a sale to another PE fund (called a secondary sale). But an exit is nowhere in sight.
The corporate landscape is littered with hundreds of such examples. PE investments in some 630 companies are four or more years old, according to estimates by Anand Rathi Investment Banking. Many of these investments are crying for exits.
Typically, private equity funds follow a five-year investment cycle, with an additional year occasionally thrown in to ensure returns.
The problem has been simmering for a while, but matters have come to a head now, with the 14% depreciation of the rupee against the dollar in four months further eroding investor value.
The PE industry is in a bind. Limited partners (LPs) – institutions that put down the money that PE funds go on to invest – are growing impatient. But a bleak economy and muted stock markets have slammed the door on their exit plans. And the rupee depreciation is eroding value fast – all leading to a pressure cooker situation.
“PE as an asset class will die if there are no exits,” says Praveen Chakravarty, chief executive officer, Anand Rathi Investment Banking.
Over $50 billion has been invested by PE companies in India in the past 10 years, but only $16 billion has been returned, according to VCC Edge and Anand Rathi Investment Bank.
Industry executives admit they have a rapidly worsening problem on their hands. “Given a lack of positive sentiment, open capital markets, economic upswing and FDI inflows, exits are very tough,” says Sameer Sain, co-founder of Everstone Capital. “2014 will be a year of reckoning for PE funds in India.”
PE funds made many investments around 2004-2006 when the rupee was at 45-50 to the US dollar. Today, it has crossed Rs 60. This places even more stress on fund managers and promoters to squeeze out exits. “The recent currency depreciation also makes returns meagre… even though in rupee terms the returns may have been healthy,” says Archana Hingorani, CEO of IL&FS Investment Managers.
If the rupee had been at 45-50 to the dollar, they would have liked to earn around $220,000 for every million dollar invested. But now, to achieve the same rate of return with a sharply appreciating rupee, they need to sweat their portfolio more and squeeze out $280,000 for every $1 million.
And the wait for the exits is growing. “Earlier, a three-to-five year exit horizon was the norm,” says Hingorani. “This has now moved to a five-to-seven year hold period.”
Even for those few funds that have done relatively well with exits, there are constant worries about the market. For example, Satish Mandhana has steered the return of 60% of IDFC PE’s funds through 19 ‘liquidity events’ (such as IPOs), totalling over Rs 3,000 crore. “The India opportunity is getting re-calibrated by international investors in the short term,” he says.
Source: Economic Times

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