Private Equity Exit Painful as Rupee Falls
The rupee fall may have made the realty scenario attractive to NRIs improving property sales among them. However, it is not a good scene when it comes to private equity (PE) investors who fund the real estate developers. The PE firms are not only stuck with their current investments due to real estate stagnation, but are also unable to raise fresh funds for further investments.
Indian rupee has fallen up to almost 27% since April 1st till end of August. In fact, in the last two years, the currency slipped by about 46% to hit an all time low of Rs. 68.63 against the US dollar in August. This scenario has almost wiped out any meager returns a foreign private equity firm would get from the Indian real estate industry. Offshore firms that invested a few years ago when the Indian currency was between Rs. 42-52 against the US dollar will face a loss of 25-30% in dollar terms if they exit. They also find extremely challenging to find good returns because of the weak rupee and underlying market.
How falling rupee affects PE firms
Most foreign PE investors invested in the Indian real estate industry when the exchange rate was stable around Rs. 45 against the US dollar, expecting a 25% return on investment. The current depreciation of rupee and uncertainty in real estate industry will make the firms wait for a full cycle for the currency to settle down before they make any fresh investment decisions. The firms are also likely to get an exit only after a cycle of seven years at an exchange rate of Rs. 60 against the dollar, which is still a 25-30% loss in itself. Apart from these, real estate properties which are a PE firm’s major assets have not seen any major appreciation.
Experts feel that eventually most foreign investors may have to exit with a loss. According to them, as a PE firm’s funds come to an expiry, savvy investors will eventually press for exit understanding that most currencies around the world are following similar downward trend. According to experts, these firms will not be able to hold on to their assets for too long in anticipation of the rupee value returning to a proximity of Rs. 45.
Foreign investment trends
The level of foreign private equity investment in Indian real estate has come down drastically during the first half of 2013. The industry saw an approximate PE investment of Rs. 1,600 crore in the first half of 2013 compared to Rs. 3,050 crore in the first half of 2012, a fall of 46% in investment. The country is not expected to see any flow of private equity investments for the next 2-3 quarters till the economy stabilizes at a macro-level.
Some experts tend to differ with the general consensus saying that the PE investors will still gain in terms of rupees and most seasoned investors usually hedge their position. A depreciating rupee just leads investors to increase their hedge costs at their end. Some experts also believe that the capital inflow will not completely stop. Private equities are however not hedged due to their structure. This has a sharp impact of currency risk on exits. Most experts are hopeful that though the 2013 fall is indeed a matter of concern, it is a short term event.
