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  • South Asia

Demonetization only a short-term negative for India PE - AVCJ Forum

  • Tim Burroughs
  • 06 December 2016
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India’s demonetization policy, which has seen the most commonly used banknotes removed from circulation as part of efforts to combat counterfeiting and black money, will hurt private equity in the short term, but the longer-term outlook for the industry remains positive.

"Until September we were coasting along, with growth above 6%, inflation at 4%, the rupee stable despite Brexit and the impending US election, and the stock market up 9%. As a result of demonetization the growth prognosis has deteriorated, but it will be temporary," Ranjit Shah, managing partner at Gaja Capital, told the AVCJ India Forum. He noted that even in the light of these developments, the currency has not depreciated markedly and the stock market remains up year-to-date.

Based on the pace at which the government is issuing new currency - replacing the now defunct INR500 and INR1,000 banknotes with new INR500 and INR2,000 bills - it will take three or four months for the volume of money in the economy to return to its previous level. Meanwhile, the short-term pain for private equity, reflected in portfolio company earnings taking a hit, will last no more than three quarters, according to Sanjay Kukreja, managing director at ChrysCapital.

He is bullish on the changes, describing 2016 as the year "for cleaning up the system," with policy reform stretching from demonetization to the clarification of retrospective taxation of M&A transactions. "I cannot remember the last time we had to explain regulatory and tax changes to LPs," Kukreja observed.

On a global basis, there is no shortage of capital seeking exposure to private equity. William Kelly, CEO of CAIA Association, warned of the pervasive impact of so much dry powder, citing a Cambridge Associates study that puts the total at $600 billion and a Preqin projection of $1.3 trillion. "People are looking for private equity returns of 20-30% but they would probably take 10-20% just to get that average return up," he said, adding that excessive dry powder generally leads to reduced returns.

India's private equity industry has found it harder to attract capital in recent years, although sentiment is improving. LP commitments to country-focused funds amounted to $24.3 billion over the last seven years, only slightly more than the aggregate raised during the boom period of 2006-2008.

"There is no comparison between 2006-2007 and today. We raised a $1.25 billion fund in 2007 but ended up cutting it down because we could not invest that kind of money. We had $4 billion in demand - it was ridiculous. We had so many LPs coming to India for the first time," said Kukreja. He claims that more than 100 GPs were targeting India deals in 10 years ago but now ChrysCapital only sees 7-10 competitors in its $50 million deal size sweet spot.

The AVCJ India Forum is taking place in Mumbai on December 6-7. For more information, go to www.avcjindia.com.

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