On Wednesday, McKinsey published its latest report on the Indian private equity sector and made suggestions for the future. According to the report, private equity in India has had an overall positive impact on the Indian economy, but returns have been dropping and more regulation is needed.
Drop in Returns
The management consulting firm’s report, titled ‘Indian Private Equity: Route to Resurgence’, painted a stark picture of the industry’s returns. While firms made an average gross return of 21% until 2007, the recent years have seen the returns drop significantly.
After 2008, private equity investors have made an average gross return of 7%. Along with private equity returns, the public market returns have also declined, but not as significantly. Prior to 2007, average public market returns stood at 18%, whereas this has dropped to 11% after 2008.
The declining returns have influenced global appetite towards the Indian markets. While global private equity firms raised around $65 billion for investments in India between 2001 and 2008, during 2009 and 2013 the fundraising efforts had declined to just $29 billion.
Multiple Factors Behind the Decline
Although the financial crisis on 2008 played a significant role in the declining returns, other factors have also played their part. The McKinsey report said the overall investment ecosystem in the country has remained challenging and the boom years raised plenty of capital, with nearly $75 billion of the capital invested in the country between 2000 and 2008 still under investment.
Private equity firm numbers in the country also soared during 2007 and 2014. Firm numbers have nearly doubled from 65 to 137. The problem has been how many of these companies have not been experienced in the field of investing.
Private equity industry has pumped a lot of capita to the Indian economy and the report believes the industry has a lot to offer in terms of future growth. The industry invested over $103 billion in India between 2001 and 2014, providing plenty of capita for the region’s businesses.
But the McKinsey report calls for further changes to support the industry. According to the report, the officials in India must establish “an enabling environment for overseas investors” through a number of methods ranging from simplified delisting procedures and providing a more streamlined tax regime.
Reuters quoted the report stating, “As the general economic sentiment in India turns positive, the country’s private equity industry has a real opportunity to regain its past vibrancy and move towards making an even greater impact on the economy”.
India’s Minister of State for Finance, Jayant Sinha, was present during the announcement of the report and promised to focus on working towards a more suitable investment climate. “We have what is necessary to be a global financial hub. We are trying to make sure as far as the tax and regulatory regime is concerned, it is best in the world,” Sinha was quoted saying in VCCEdge.
The industry itself is rapidly maturing. The number of managers that have been in charge of more than one fund has doubled between 2009 and 2014. Many foreign investors have also outlined their commitment to the region and some are considering increasing funding allocation to the country, despite the decline in returns.
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