Exits by private equity players from their investments in India are getting a tougher with returns falling and average holding period rising, says a study by McKinsey & Company.
“With strong economic growth, the private equity industry in India, on an average, realised gross returns of 21 per cent up to 2007, but following the global economic crisis of 2008, the environment changed. After 2007, returns based on exits dropped to 7 per cent, well below capital market benchmarks, fundraising stalled and exit options became scarce,” McKinsey study said.
The average holding period for investment increased from an average of 3.1 years between 2001-2007 to 4.4 years during 2008-2013, climbing as high as 5.7 years in 2013. Of $51 billion invested in 2000-08, only $16 billion could find exit, it said.
It said major factors that hurt private equity investment after 2008 were competition for a small pool of assets, challenging macroeconomic environment and limited influence on entrepreneurs. “Private equity firms emphasised their key challenges were with management capabilities, corporate governance and capital discipline, all of which impact value creation,” said Rohit Kapur, client director, Mckinsey.
Investments of more than $103 billion have gone into about 3,100 domestic companies between 2001 and 2014, according to the “Indian private equity: Route to resurgence” study.
McKinsey said firms backed by private equity generally improve their corporate governance by, for example, introducing independent committees for audit and compensation and enhanced board oversight.
When survey respondents were asked to name the most significant contribution by private equity board members within six months of initial investment, 65 per cent of executives pointed to material changes in compliance measures, including new auditors.
“Companies with revenues Rs 750 crore (about $125 million) backed by private equity contributed about 18.8 per cent of the corporate tax receipts for all companies of a similar size, more than 13.1 per cent share of total revenue within this group,” it said.