India PE entering 'logjam' phase

Average IRR is 15% and forecast to go lower, unless firms work to improve EBITDA before exiting.

The average IRR of private equity exits in India during 2010-2013 was 15 percent compared to 30-60 percent IRR during the period 2004-2009, according to a report by Venture Intelligence and Avalon Consulting, which calculated IRR based on aggregate figures for 60 percent of India deals.

The report also found that during 2010-2013, labeled the “melting pot” phase, most exits took longer than four years. During 2004-2009 (the “India shining” phase), most exits were achieved in less than three years.

Exits during the earlier phase were mainly through IPO or primary market sale, and many of the investments had been PIPE deals.

Currently, GPs are focused on exiting their portfolio companies. Just under $14 billion worth of private equity investments are waiting to exit in India – most having been invested in these assets for over six years, further lowering IRR expectations. 

The majority of these investments were made during 2004 to 2009, when $25.8 billion of capital was ploughed into India, nearly half ($10.1 billion) in 2007 alone.

The report suggests the next period will be even more challenging for firms.

Going forward, the report called the period from 2014 onward the “looming logjam” phase, and forecasts that exits will take even longer (most more than six years) “yielding even lower returns mainly through secondary sale and buy back”.

“Successful exits will call for a more ‘interventionist’ approach from PE – pursuing specific, relevant, time bound and rigorously implemented value enhancement initiatives with management.”

Several examples of such exits from the past demonstrate the way ahead, the report said.

Examples include ChrysCapital's May 2009 exit from Shriram, gaining an 8.78x return after a 51-month holding period, The Carlyle Group's January 2014 exit from Thirumala Dairy, gaining them a 4.55x multiple after 44 months and SAIF Partners' exit in May last year from Justdial, which gave them a 12x return multiple after 80 months of being invested. 

“Look at [Justdial], the possibility of making disproportionate [returns on] capital is much higher in the early stage,” said Mukul Singhal, vice-president of SAIF Partners, in the report. 

Carlyle's managing director Shankar Narayanan, said of Thirumala, “Carlyle’s investment in Tirumala exemplifies its ability to partner with entrepreneurs to create value for all stakeholders. During Carlyle’s investment, the company’s revenues grew two and a half times and profits more than quadrupled.”

These examples “indicate that longer holding periods can result in exceptional returns if the time is spent productively in value creation”, the report concluded.