People thought it couldn’t get any worse for private equity firms in India. But that was before the Indian rupee slumped to INR 65 to the dollar in early September, down from about INR 55 at the same time last year.
Currency risk has brought fresh problems for India GPs who have already been coming under pressure to divest and show returns to LPs. Thanks to the recent steep drop in the rupee, any GP exiting an investment would take a big hit on returns.
“We haven’t seen such exchange rate volatility in the last 30 to 40 years, which is a large statement. The volatility has been such that if you are sitting on a 3x return, it can very easily become 2x or 1.5x on one hand, or [even] 4x on the other hand,” says Amit Garg, senior vice president at Mumbai-based Edelweiss Capital.
Investors continue to believe that entrepreneurs are asking too high a price for their businesses: sources estimate prices remain in double-digit EBITDA multiples, with some getting as high as 13x EBITDA.
In addition, India’s economic engine is slowing, and far more dramatically than China’s. India’s annual GDP growth was 3.2 percent last year, compared to 10.5 percent in 2010, according to the World Bank. Many industry sources believe the macroeconomic situation is likely to worsen.
Brahmal Vasudevan, founder of Creador, which invests in India and Southeast Asia, says: “This depreciation doesn’t happen completely linearly, but fundamentally [it] will continue as long as India runs these high current account deficits, which it has for the last 15 years, and as long as inflation runs at these very elevated levels.”
India’s current account deficit hit a record high of $30 billion late last year, second only to the US, according to data from India’s Corporate Debt Restructuring institution.
In fact, Creador is so skeptical about the chances of generating good returns in India that it has decreased its allocation to the country to less than 10 percent in Fund II, down from around 30 percent in Fund I.
The currency issue also impacts valuations. Investors continue to believe that entrepreneurs are asking too high a price for their businesses: sources estimate prices remain in double-digit EBITDA multiples, with some getting as high as 13x EBITDA.
Vasudevan believes that only investments in companies with 25 to 30 percent annual growth are positioned well in the face of the fast depreciating rupee, and those targets tend to have high valuations. “We don’t find the valuations in the market reflect all the problems that India has,” he says.