Exit environment to get better for PEs: Mckinsey

Lifting of allocation cap, removing irritants relating to tax provisions key, says report

The exit scenario for private equity (PE) firms investing in India is likely to get better in the coming years, according to global consulting firm McKinsey & Co. But, PEs could do with some help from regulators, it added.  

Vivek Pandit, senior partner, McKinsey & Co in India said, “With a positive macro-economic environment and strong GDP growth projections by a stable government, general partners are optimistic about the PE sector in India. We expect the exit environment to improve.”  However, he added that “an enabling regulatory environment is needed to attract further investment”.

A report titled ‘Indian Private Equity: Route to Resurgence’ published by McKinsey, identified four areas where regulations could further help forge a resurgent path ahead for the industry. “First, mobilising greater domestic institutional capital for private equity will require existing allocation ceilings to be shifted for certain types of investors. Second, it will be critical to create an enabling environment for overseas investors by removing practical impediments related to withholding taxes and safe harbour norms for advisors to overseas investors. Third, simplifying delisting norms for closely held companies and defining a robust court receivership process will expand the investible universe available for investors. And last, providing a more certain and robust securities and tax regime will help private equity investors exit in a timely manner,” the report said.  

The report explained how the changing scenario for PE investors restricted the options available to them to exit investments, at the end of their intended investment periods, following the collapse of Lehman Brothers in 2008.  

Hostile capital market conditions ruled out public offerings and global strategic interest in Indian assets was low due to stressed conditions in the developed markets amongst other factors, making direct sales difficult. Projects by capital-intensive portfolio companies were often behind schedule, delaying the prospect for a reasonably profitable exit.

The report said between 2001 and 2007, PE firms held investments in India for an average of 3.1 years and from 2008 to 2013, the average holding period for exited investments jumped to 4.4 years, climbing as high as 5.7 years in 2013.

Also, while PE firms had exited from about 32 per cent of investments made between 2000 and 2008 on a cost basis, exits from infrastructure and related industries were slower, which is about 20 per cent in engineering and construction, about 15 per cent in real estate, and about 10 per cent in utilities and energy.

The texture of exit options changed from 2002 to 2008, sales to strategic investors accounted for about half of the portfolio exits for PE in India, with Initial Public Offerings and other market options accounting for 31 per cent.

But these options lost the ground after 2008, as potential investors had became unwilling to commit to mid-sized growth companies. The regulatory restrictions on foreign listings and share lock-in periods added further challenges.

Meanwhile, while some long-established funds sought exit options, newer ones were deploying more capital. By 2013, sales to PE firms accounted for almost a third of portfolio exits and it was a greater proportion than any other exit option.