The Hindu Business Line : Pvt equity funds hope to achieve 30-35% on investments

Bangalore, Dec. 18 With global liquidity remaining tight, private equity (PE) funds return expectations from investments have escalated to 30-35 per cent.

Till about a year ago, most PE funds that had invested in India were satisfied with internal rates of return (IRR) as low as 15 per cent. IRR is the annualised effective compounded return rate, which can be earned on the invested capital. California-based Nexus Capital (India) founder partner, Mr Naren Gupta, said, “Investment risks have increased and so have the funds’ investor return expectations.”

In fact some of the PE funds that had essentially functioned as leveraged funds have already defaulted on investment commitments in some large infrastructure projects in the country. Leveraged funds essentially operate through carry trade mechanism. Such funds borrowed in the US markets at low interest rates and invested in an assortment of emerging market equities that included China and India. Cumulative PE investment in India is currently estimated at close to about $25 billion.

Flows slowdown

However, investment flows have slowed down considerably. PE and venture capital inflows are estimated to be around $8 billion in 2008 as compared with $10 billion in 2007. The investment to exit timeframes has also increased to about five-seven years.

IDG Ventures India’ Managing General Partner, Mr Sudhir Sethi, said, “We are reconciled to stay invested for longer period in view of the current conditions. This could be at least about one or two years more.” Most PE funds that had invested till last year had locked in only for up to three years.

Credit rating agency, Brickworks Ratings Chief Executive, Mr Vivek Kulkarni said, “Extended timeframes exposes leveraged funds to mismatches. Therefore increased timeframes do not provide space for leveraged funds to function in current environment.”

Leveraged funds

As a result, PE funds that have vanished are mostly leveraged funds. The massive de-leveraging in the US financial sector have cutback on flows into the emerging markets. De-leveraging implies shedding of liabilities, including repayment of borrowed funds.

If foreign institutional investments (FII) are taken as cue for the PE fund inflows, they clearly appear to have slowed. Till December to date this financial year, FII outflows were about $11billion.

Clearly indications are that PE funds and VC funds, bankers said were unlikely to have diverged from this trend. Both these funds have closely followed the FII trail in the past.

But Mr Gupta said, “We have a $320 million fund for India and we plan to stay invested for at least up to six years and nurture the enterprises.” The focus though was not hard infrastructure such as power, ports or highways. Instead funds preference was increasingly in favour soft infrastructure that included social sectors such as education and healthcare.

The PE fund exit also coincided with the complete evaporation of foreign debt flows into the country. Bankers said that this year very little ECBs have come into the country so far. PE/ VC fund return expectations also coincided with the high spread for ECBs. Two years ago ECBs were available at spreads as low as 125 basis points over the London Interbank offered rate. Currently, the spreads are still about 600 basis points over L, leaving little interest for cross-border resources.

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