Private equities’ returns jump to 22% from 8% in 5 years
The report also notes that buyout strategies (a deal in which majority ownership is acquired) earned the best returns for PE players with median returns at 21%.
“Average returns on exited investments have risen from 8% from the 2006–2008 vintage to 22% in the 2012–2014 vintage,” says the ‘Indian Private Equity: Coming Of Age’ report by McKinsey, which analyses a dollar internal rate of return (IRR) for a sample of 654 PE exits between 2003 and 2017.
The report also notes that buyout strategies (a deal in which majority ownership is acquired) earned the best returns for PE players with median returns at 21%. “Several private equity firms shifted focus from minority positions to buyouts, where they have greater control of strategy and talent as well as influence on the manner and timing of exits,” the report says. From 2015 to 2017, almost a quarter of total PE investments were in buyouts — up sevenfold in value from the 2009-2011 period.
Consumer goods, financial services, healthcare, IT/BPO, machinery & industrials and telecom collectively accounted for 83% of total PE investment from 2015 to 2017, compared to 44% share during the 2009-2011 period. Sectors that contributed the most to improving returns were financial services, consumer goods and machinery products as median returns in these were in the 15-21% range, with telecom pulling down performance for PE investors by recording a 3% median IRR.
The study also observes a trend of out-performance among companies backed by PE capital. In a reinforcement of the industry’s hunt for “alpha” ventures, the report says businesses with PE backing grew faster than industry averages, raising revenue and profit on an average 27% faster than their peers.
EY India partner and national leader for PE services, Vivek Soni, believes there is a high degree of correlation between fund managers closing follow-on funds and industry performance. “Those general partners (GPs) that are able to deliver returns will find it easier to raise follow-on funds, and this along with increasing numbers of total funds under management with GPs is an indication of improving returns,” he says.
“The growing pace of exits in the last few years with sustained growth is a big positive as Limited Partners previously cited the lack of exits as perhaps the biggest issue faced by them when investing into India,” says IVCA chairman and Tata Opportunities Fund managing partner Padmanabh Sinha. “The fact that exits are being achieved through a balanced mix of capital markets, strategic sales and sales to financial sponsors is also reassuring the availability of multiple exit options,” he adds.
For instance, industry watchers see recent exits’ track record of PE firms like Chrys Capital and Kedaara Capital as indicators of improving performance. Further, a fund-raise of around $600 million by True North Capital (one of the country’s earliest homegrown PE funds) for its latest Fund VI also supports the trend.
However, accessing performance data on PE and VC funds continues to be a challenge as regulations on disclosing returns are not too well developed. EY’s Soni considers the space to be “evolving” in that aspect, and says the trait of “survivor bias” currently characterising the space could change as the market matures.