Past Reports

Recommendations

Info

India Venture Capital and Private Equity Report 2014 7.1 Trends on returns obtained The overall view has been that the returns from investment in PE have not lived up to expectations. According to data from Cambridge Associates, the average 10 year return from Indian PE was 5.8% as compared to the global emerging markets average of 12.4%. 1 The various respondents have indicated that, "Overall I would say, as of today, we have been little disappointed with the performance of the managers that we have given money to in India." "Even structured credit and some listed play may actually have returned better money than private equity in India on the average." "I would say that the Indian PE market is in a phase where the majority of the LP's in general, and not just our clients, have been disillusioned...” Our analysis on exits (Exhibit 6) also seemed the reinforce the sentiment of LPs. Average returns from investment exits were estimated to be less than 20 percent, indicating that the fund level returns would be even lower, after taking into account the currency depreciation for foreign LPs, management fees, and losses on investments that had to be written off. However, some of the respondents indicated that the returns from the funds raised in the early 2000s (i.e., during the period 2000 - 05) have been quite attractive. It was during the years that some successful world class companies emerged in the IT and BPO sectors and investors who funded these companies earned good returns. The first 'wave' of IT and BPO investment was successful because of the nascent stage of the industry. While there were subsequently many 'waves' such as retail, consumer services, etc., they were not as successful. The success of the initial funds encouraged more LPs to consider India, because of the large market size and growth rate. The initial success of the funds also encouraged others to become GPs and enter the market. As one of the respondents indicated, "Around 2004 - 2006, the number of GPs exploded and it coincided with the time period when number of LPs interested in India based on the early success also increased. Fund raising increased dramatically during 2005- 07. There have been stories of funds that have been able to raise hundreds of millions in a matter of some couple of months." This rapid expansion has not gone well. Those funds that have been raised during the 2005-07 vintage, would have reached the 5-7 year life in the last couple of years. As indicated during one of the interviews, "This period could be the point where, if not actual distributions, we would at least expect portfolio companies to be mature with solid earnings growth, and even if IPO markets are difficult you know you are sitting on solid assets. Unfortunately that has not happened - the companies have neither achieved incredible growth nor incredible multiple expansion. While there has been lots of money that were invested, money has not been returned. Even if money has not been returned, value of the portfolio companies is not that high." Under the circumstances, the depreciation of the rupee in 2013 against the dollar further impacted the returns. It was therefore felt that though the initial years 2000-05 provided good returns, those who missed that and invested in the funds during 2005-07 were affected by poor returns. Investors who invested in the later year funds on the basis of the opportunities indicated by the GPs, are, "feeling a sense of broken promises. The GPs try to attribute the reason for poor performance to macro or other factors, other than themselves. There has been a sense of betrayal by that argument. PE investors are looking for absolute returns. Somewhere along the way there has been a disconnect between what was promised and what was ultimately delivered. Many LPs are questioning, what is wrong? Are the guys [the GPs] not really capable? Are the poor reasons because of macro factors? Is the performance driven by the manager or something else? There is uncertainty about what to believe anymore because a lot of what was promised had not happened. I don't there is an issue in terms of communication or developing relationships. I have been quiet comfortable what I have seen. It is more a © Indian Institute of Technology Madras 82
India Venture Capital and Private Equity Report 2014 question of the people not having delivered over long enough period of time. One just have to say at some point that there is something wrong and the question of whether we want to trust them again comes up in the open." The main reason behind the lacklustre performance has been the lack of exits from portfolio companies. This theme has been underlined both by the domestic as well as foreign LPs. One of the respondents indicated that out of the 2500 PE investments in India, it has been estimated that more than half are unlikely to return any capital to the investors, while only 10 per cent of the investments are expected to give a decent return on the capital invested. Since the PE funds are structured as closed ended funds with a well defined fund life, timely exits and distribution of returns is of paramount importance. When exits cannot be made, then it indicated the quality of the investment. As indicated by one of the interviewees, "If nobody wants to buy the investment, it suggests that it may not be that good after all and regardless of whatever the GPs indicate about the value of the investment, the ultimate validation is the price one gets at time of exit." 7.2 Perspectives on the Indian PE market Over time, the LPs have formed their own perspectives on the Indian VCPE market based on their experiences of investing in Indian GPs. Some of the main themes that emerged in the discussions with the LPs are summarized below. Comparison of India with other emerging markets: Foreign capital inflow is an important source of capital for PE in emerging markets. Because of this reason, PE investment in emerging markets, in general, are strongly dependent on various macro factors. When foreign capital dries up, then exit becomes difficult due to lack of buyers. While some of the issues faced in India are common to other emerging markets like China, Indonesia, Thailand or Vietnam, the effect is more pronounced in India because of the size of the market and the impact. It is also felt that Indian promoters are savvier than their Chinese counterparts, so they are able to extract more value from the investors. Arbitrage between the public and private market: It is normal to expect a large difference in valuation between the private and public market. While such arbitrage opportunities between the two markets seem to exist in Brazil, China, and other countries in South East Asia, in India it has been negative. Many of the well-run companies in India have already gone public, and the choice for investors who want to invest only in PE is therefore limited. The next set of companies that are available may not be of the right quality to give appropriate returns. As told by one of the LP, "the returns have been slightly better in doing PIPEs in listed stocks in the bigger companies." Scaling up: Investors also felt that, "scaling up businesses in India is exponentially tough when the size of the business is small, but it becomes exponentially easier as the size of the business becomes bigger." Larger companies are able to clock higher growth rates than small companies because of the branding and other strengths like distribution, which are not available to the smaller companies. Valuation: Large amounts of capital has been raised in the private markets in recent years on the basis of large market (more than 1 billion population), strong economy ($1.6 trillion in terms of GDP), very high economic growth, and liberalisation of the economy. As one respondent indicated, "There is $30 billion of dry powder available to invest in the country, and we are doing about 8 -10 billion dollars of investments every year in PE. As a percentage of GDP, the Indian private equity market is among the largest in the world. It could be almost as large as that of the US as a percentage, and about 4 times of what happens in Chinese market as percentage of GDP. When too much capital comes pricing becomes quite transparent and fairly high, so most of the deals become kind of auction deals. Everyone is bidding a price, they don't want to deploy money but they have pressure to deploy money, so it drives up valuation on the private market." An example given to cite the point was, a decent size pharmaceutical company in India quotes at 15-20 times earnings, whereas in the US, © Indian Institute of Technology Madras 83
Page 2 and 3:
Past Reports
Page 4 and 5:
© Indian Institute of Technology M
Page 6 and 7:
India Venture Capital and Private E
Page 8 and 9:
Page 10 and 11:
Page 12 and 13:
Page 14 and 15:
Page 16 and 17:
Page 18 and 19:
Page 20 and 21:
Frequency Frequency Frequency Frequ
Page 22 and 23:
Page 24 and 25:
Page 26 and 27:
Page 28 and 29:
Page 30 and 31:
Exhibit 1 Indian Insurance Companie
Page 32 and 33:
In the life insurance segment, the
Page 34 and 35:
Page 36 and 37:
Page 38 and 39:
Page 40 and 41:
Page 42 and 43:
Exhibit 2 Pension Funds and Univers
Page 44 and 45:
PFRDA The Pension Fund Regulatory a
Page 46 and 47: India Venture Capital and Private E
Page 56 and 57: RBI brought out detailed prudential
Page 58 and 59: would prefer if banks invest/ lend
Page 66 and 67: Exhibit 4 Public markets as a sourc
Page 68 and 69: een substantial interest among non-
Page 78 and 79: Exhibit 5 Direct Investments from L
Page 92 and 93: Exhibit 6 Returns from VCPE investm
Page 94 and 95: however, accounted for only 17% of
show all

Past Reports

Create successful ePaper yourself

Delete template?

Save as template?