The sharp fall in rupee against the US dollar has prompted many foreign private equity funds to up their return expectations in rupee terms for new investments in India.

The rupee is now down by nearly 20 per cent against the dollar from a year ago, adding to the several previously unforeseen challenges for the PE investors.

“Our return expectation will go up purely on account of rupee depreciation as we are a US dollar denominated fund. General PE activity will slowdown as everyone is looking for higher rupee returns to keep the same dollar returns”, Mr Biswajit Subramanian, Managing Director, Providence Equity Advisors India, said.

Assuming an investor from the US invests in Indian equities, his/her returns would be affected both by the change in the price of equity and the change in the value of the Indian rupee against the dollar.

So, even if the investor realises a 15-per cent return on the equity investment, the gains will be nullified if rupee slides 15 per cent. For investment made one year back, the return in such a case will be negative due to 20 per cent fall in rupee.

Slide & uncertainty

The rupee slide and regulatory uncertainty are among the several factors that could lead to slowdown in private equity activity this fiscal, according to PE funds.

With the IPO market being comatose, the exit options are getting narrower for those funds who invested 4-5 years back. Investors now expect secondary sales to emerge as the primary mode of exit in the coming months.

“If I was previously looking at 20 per cent return in rupee terms, now I will look at say 25-30 per cent return to account for possible depreciation of rupee against the dollar,” Mr Subramanian pointed out, adding, “this is before putting into effect any of the uncertainty from Government regulations.”

Over the last 4-5 years, Providence Equity has made cumulative investments to the tune of $1 billion in 4 companies — in the telecom, media and technology space.

Ms Kalpana Jain, Senior Director, Deloitte Touche Tohmatsu, echoes the views of many PE funds on return expectations. “PE funds are now altering the return expectations in rupees because of erosion of value”, Ms Jain said.

Different take

Mr Bobby Pauly, Principal-Tata Opportunities Fund, Tata Capital has a slightly different take on the rupee return expectation issue.

While return expectations may not have necessarily gone up, PE funds are perhaps being far more disciplined about entry valuations and exit assumptions, he said. Transactions are being processed more prudently than before. Fund managers will in no doubt be pricing in risks in exchange rates more judiciously now than the past, Mr Pauly said.

The fall in rupee may be beneficial for near-term investments if one has a positive view on the long term stability and appreciation of rupee, he said.

Tata Opportunities Fund having already raised $ 600 million from global investors despite very testing fund raising climate, is very actively pursuing avenues to deploy capital, Mr Pauly said.

The rupee's fall has impacted PE investment's but the India story is still saleable. “We will do new investments if they meet our return thresholds. You never know. We are constantly in the look out. This difficult environment does not mean we will sit on the sidelines,” said Mr Subramanian.

>krsrivats@thehindu.co.in

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