Private equity firms investing in India and Southeast Asia must factor in extreme currency volatility when considering investments in the region, delegates heard at day two of the PEI Asia Forum 2014 in Hong Kong.
“We often get asked the [currency] question by LPs. I think the first thing one has to think about is that you will have currency volatility particularly in markets like India and Indonesia. [Particularly] in India, people don’t realise this,” said Brahmal Vasudevan, founder of and chief executive of Creador.
He explained that since 1991, there has been an annual 5.5 to 6 percent decline in the Indian rupee against the dollar – a downward trend he expects to continue.
“So the first thing we think about in India is we have to find businesses that grow 25 to 30 percent per year, and secondly you have to be very disciplined about the valuation that you pay.”
He adds, “In Indonesia we worry a little less, the fundamentals are strong. In India the big problem of course is that the current account has been running at negative 4 to 5 percent for 15 years, inflation is very high and those two things generally have an impact on the currency. When we look at Indonesia, we don’t worry as much about currency [because] the fundamentals are much more balanced.”
However, some believe it is too difficult to hedge the currency risk in India.
Bruno Seghin, senior partner at Navis Capital Partners, “India is the most difficult country. You can’t hedge – the cost of hedging is really as high as the loss you could face. [But] in Southeast Asia, you can manage by finding high growth if it is purely a domestic business.”
For example, in markets like Vietnam, it is possible to find companies growing at 40 or 50 percent per year, which would mitigate the currency fluctuations that occur during the holding period, Seghin explained.
“We look at structural ways to try and mitigate the currency risk but the reality is it becomes way too cost prohibitive, given that we have long-term cycles of three-to-five years and limited visibility on timing of the exit,” said Paul Kang, senior partner and head of Southeast Asia at Headland Capital Partners.
He explains that firms have to rely on the growth and the “entrenched market share” of strong, resilient businesses in order to hedge the currency risk.
“If it is [a business] exposed to a higher depreciating currency market, then we will price it in and have to make sure the business is managed and the investment thesis is positive so that it will outgrow that currency [drop]. Most of us want to invest in Asia because we want exposure to growth, but [therefore] you are going to meet some currency risk,” he added.