Home > Entrepreneurship, India, Venture Capital / Private Equity > Is VCPE investing in India too risky?

Is VCPE investing in India too risky?

In casual conversations with me over the past year, several foreign investors have summarized their concerns about investing in India as one or more of:

  • Too pricey: valuations are rich
  • Serious governance issues: revenues, expenses, profits are all subject to shenanigans
  • Exchange rates can take a big bite out of returns
  • Exits: where are they?

And yet, India is the third favorite destination for LP dollars after the US and China.  This is primarily because India does offer exciting growth opportunities that can produce attractive returns for investors who know how to manage the risks well.

Valuations: These are rich as I pointed out in jest in a previous post.   However, every fast growing market has evolved to trade in forward multiples rather than trailing ones so investors factor in the rapid pace of growth into their valuations.  Listed markets are primarily quoted in forward PAT or book multiples and this bleeds over into private market investing as well.   However, PE investors have resorted to convertible structures that allow them to pay up for performance while protecting their down side if management projections do not materialize.

Governance:  Earlier this week I attended a seminar focused on addressing governance risks as PE investors.   It was fascinating to hear of others’ experiences since almost everybody present had run into these.   These run the gamut from shady antecedents of promoters, to misappropriation of company assets, to hidden nexuses with unsavory political and criminal characters.  But it was plainly obvious that over the past two decades, a body of knowledge about these risks and techniques to mitigate them has been built up.    The investor community is now a mature body with long memories and deep networks which along with best practices in governance has learned to manage these risks effectively.

Exchange rates:   It is true that the rupee has swung between 53 and 39 INR for each USD over the last 24 months which is a 30% swing.   Your rupee returns would have a 30% hurdle to clear before producing any real returns in the worst case.    But this is an extreme scenario which could swing either favorably or unfavorably.  Hedging (either literally or via timing of exits or via operations of your portfolio companies) can go a long way towards mitigating this.

Exits:  It is true that the one large exit that everybody is still talking about is the cool $1.6B (4.5x) that Warburg Pincus realized for its investment in Bharti.   But there has been a steady trickle  of exits over the past few years.  The current quarter is on track to produce over a $1B in exits for PE players and the “exit party” is not quite on yet.

India can be a rewarding investment but you have to approach it with care.  KPMG has a good write up on a similar subject here.

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