The depreciation of rupee over the recent past has hit domestic private equity (PE) investors hard. As PEs tend to stay invested for 7-10 years, many investments made during 2006-07 are now badly affected.
As a considerable chunk of private equity funds were also mobilised in dollars, the rupee deprecation is bound to increase their payouts in dollar terms resulting in a heavy burden.
“Because of this we have lost money even before we could make it,” Srini Raju, Partner, Peepul Capital, told
According to Reserve Bank of India data, the number of private equity deals in India increased from 82 in 2004 to 439 in 2007, with the total investment rising from $1.72 billion in 2004 to $13.27 billion in 2007.
PE funds that raised money in dollars would be the hardest hit in the current situation. In the last couple of years, the average loss owing to currency depreciation alone can be pegged at 20-30 per cent, said Mahesh Murthy, venture capitalist and founding partner of Mumbai-based SeedFund.
One option for PEs now is to look for Indian money and investors.
“PE funds investing since 2009 are facing severe headwinds due to depreciation of the rupee. Depending on when one invested, the impact can be calculated. For example, the rupee has weakened from around Rs 40/$ in 2007 to Rs 60/$ now. This means the loss is 50 per cent,” explained Viswanath Chebrol of India Life Sciences Fund.
According to Satish Andra, Managing Partner, Ventureast Tenet Fund, “Such volatility is not good for both VC and PE firms. For instance, if they had based their investment on internal rate of return (IRR) of 20 per cent, due to rupee slide they would have to make additional 20 per cent.
“However, it augers well for new investment. But when they consider returns in dollar terms, the weak rupee adds to their concerns,” he said.
TROUBLE AHEAD
Going by the current trend, PEs in other emerging markets, which are witnessing weakening of their local currencies, are also bound to be hit, say experts.
Emerging markets have over the years become important in terms of both private equity fund-raising and investments.
While fundraising has increased 10-fold, from $6.5 billion in 2001 to $66.5 billion in 2008, PE investments in emerging markets have grown 13-fold during the same period.
Though PE investments have slowed post the global financial crisis in 2008-09, all those invested in earlier periods are a worried lot now.
“As of now, we cannot say anything. We need to be in watch mode,” Raju said.