Returns dwindle for PE funds as valuations soar

Mumbai: High valuations are making it tough for private equity (PE) fund managers to deliver expected returns to investors.

“We are not seeing fund level returns, even though PE in India is today a decade-old industry," said Anubha Shrivastava, managing director-Asia of CDC Group, the development finance institution of the UK government that has so far invested at least $1 billion across 17 funds. “LPs (limited partners that invest in PE funds) expected net return of 20-25%, but today deals are being done at high valuations, bringing in the net returns to mid teens."

The pace of PE exits in India has shot up; in 2010, there were exits to the tune of $5.3 billion, a fivefold jump over 2009, according to Venture Intelligence, a research service focused on private equity, mergers and acquisitions.

This appears to be due to heightened competition among PEfunds, with close to 300 of them jostling for deals.

Also, investments in private companies are being made at a sharp premium to capital markets, which is further eroding returns, investors said.

“Generic private equity in India will see a compression in returns given the combination of expensive public comparables and a high degree of competition amongst PE funds for investment opportunities," said Wen Tan, managing partner at Squadron Capital Advisors Pvt. Ltd, an investor in Asian PE funds.

As a result, LPs have turned cautious on investing in India-dedicated PE funds.

“We are being a bit more cautious in our deployment to India. We are also more selective in our choice of managers, focusing on those who have a proven track record of exercising the right level of valuation discipline and working with their investee companies to drive superior earnings growth," said Low Han Seng, executive director of Singapore-based United Overseas Bank Ltd.

LPs are also actively monitoring performance of existing investments and seeking information about deals from fund managers, especially on sector and deal size.

“Several LPs now have a team on the ground to assess the risk-return arbitrage. Sometimes they directly invest in deals," said Hetal Gandhi, managing director, Tano India Advisors Pvt Ltd, a PE fund.

“We are seeing more returns from China. If the Indian market doesn’t see fund level returns, there will be serious calls on allocation of money to India," said Shrivastava of CDC.

PE investments have added up to $5 billion so far in 2011. The number was $8 billion in 2010.

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