PEs’ returns jump to 22% from 8% in 5 years

PEs’ returns jump to 22% from 8% in 5 years
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Chennai, Dec 4: As optimism grows about the Indian alternate investment landscape, the country’s private equity (PE) industry is getting more rewarding for investors, a report has said. More specifically, PE investments in the last five years have fetched higher returns than ones made earlier.
“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.