Rupee's depreciation to hamper private equity exits

Posted on    24 November 2011


With rupee’s outlook being weak, i-bankers are being cautious with deals already in pipeline


Already bogged down by poor market conditions and a slowing economy, deal makers in India have a new worry—a fast depreciating local currency. A weak rupee is bringing down valuations of Indian firms further, making it difficult for private equity (PE) investors to exit while Indian companies looking to buy overseas assets now need to pay a higher price.


The rupee, which has lost around 17% against the dollar from the year’s high in July, ended at 52.37 to the US currency on Wednesday.


While a weaker rupee makes inbound deals more attractive, outbound deals will be more expensive. “In some instances we advise clients not to pursue outbound opportunities now. The exchange rate fluctuation has made price fixing more difficult,” said the head of an overseas investment bank who did not want to be named.


“This is a good opportunity for inbound deals and we are seeing active interest from foreign strategic players. However, these are taking long to close,” added the banker.


The volume of mergers and acquisitions (M&As) have fallen by 43.99% so far this year, show data from Dealogic Plc, which provides information about investment banking. This includes inbound as well as outbound deals.


The drop in deal volume in the equity capital markets is 67.31% and that in the debt capital markets is 25.17%.


“The rupee is likely to depreciate further and a new high of 53-53.5 to a dollar will be reached in a few weeks. Though in the near term (over next three to six months) there will be a correction, rupee will continue to be in the 47-48 to a dollar range,” said Abhishek Goenka, chief executive officer of India Forex Advisors Pvt. Ltd.


With the outlook for the rupee being weak, investment bankers are treading cautiously with deals already in the pipeline.


“Now the issue is not about lower valuations and poor markets, the clients are more worried about what will happen next,” the M&A head of a domestic investment bank said. “There is no clarity on the rupee move vis-a-vis dollar. A weak rupee raises the cost of overseas funds as the hedging cost goes up. The cost of domestic funds is already high.”


Financing has become more expensive as companies are not sure about which fund source to tap and this is slowing down deal making, said Avinash Gupta, head of financial advisory, Deloitte Touche Tohmatsu India Pvt. Ltd. “Even banks don’t have dollar funding.”


PE fund managers who had invested in 2007-2008 and were looking to exit this year will have to delay those plans. Volatile capital markets had already made public listings difficult. “The only meaningful exit left now is strategic sales, which don’t materialize fast,” said Gupta of Deloitte.


In many cases, the value of the portfolio of PE firms have been reduced by 20-25% in past few years due to the depreciation of the rupee against the dollar, according to him. “In many instances, the fund managers are asking an extension from their investors in returning the capital,” Gupta added.


PE exits declined by almost half from $4.5 billion in 2010 to $2.3 billion in 2011 so far, according to data from VCCEdge, a financial research platform.


Bhavesh Shah, managing director of investment banking at JM Financial Consultants Pvt. Ltd, finds the current environment very conducive to investments even as PE exits have been muted. “In fact, 2012 is likely to be one of the best vintage years for PE.”


Vintage, in PE parlance, refers to the year in which the fund starts investing.


PE investments have increased marginally from $8.3 billion in 2010 to $9 billion in 2011 so far, according to VCCEdge.


In the long term, if issues such as rising inflation, interest rates and other policy issues are not addressed, the foreign direct investment flow to India will drop, experts said. “Tough times are yet to come,” said the M&A head of the domestic bank.


Shraddha Nair & Sneha Shah

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