Rupee fall clogs PE exit routes in MFIs

The unprecedented depreciation of the currency has forced many PE firms to delay their exit plans

The earlier occasion when the  microfinance sector saw some of the biggest investments by international private equity (PE) firms was 2009. Four years later, an unexpected depreciation of the rupee and a lack of investment opportunities are keeping these PE firms from exiting.

According to a 2009 report by Venture Intelligence, PE funds invested about $230 million in the microfinance sector between 2007 and 2009. The typical investment tenure of PEs is about five years and most of these PE players were expected to exit from the old investments by 2013.

For example, Lok Capital, a PE focused on financial inclusion, has held back exit plans for investments made around 2007.

“Clearly, with the present exchange rate scenario, we will wait for the rupee to appreciate before exiting. A number of our investments were made five-six years ago, when the rupee exchange rate was less than 50 to a dollar. After the crisis in the sector, investment opportunities in microfinance institutions (MFIs) have reduced drastically,” said Venky Natarajan, managing partner, Lok Advisory Services.

According to analysts, an exit at a time when the rupee is hovering around Rs 68 a dollar would mean a   30 per cent mark-to-market (fair value) loss over 2009 for the PEs.

“The depreciating rupee is one of the biggest concerns for PE players. For a long time, the rupee was stable, and such an unprecedented fall was not foreseen,” said Samit Ghosh, president of the Microfinance Institutions Network.

Most of the PE investors in MFIs are from foreign firms, said Shashi Shrivastava, senior vice-president of Grameen Capital. “Certainly, it is a difficult time for PEs looking to exit.”

In addition, with a chunk of MFI portfolios still stuck in Andhra Pradesh, where 70 per cent of the sector was concentrated before the crisis, PE firms have already written off substantial investments. In 2011, banks had restructured about Rs 6,000 crore of loans to MFIs in Andhra Pradesh. Recently, the Reserve Bank of India turned down the requests of MFIs for a second round of restructuring, while treating the loans as standard assets.

PE firms believe the rupee’s spell of freefall will abate and the currency eventually appreciate. By investing less in dollar terms, foreign PE firms are being able to pump in more rupee investments in the MFIs and an appreciation over the next five years would mean notional profits for them.

“This is a good time for investment by PEs. However, there are not many MFIs in the market with good investment opportunity. In the next six months, we can see PE deals in five to six MFIs, each ranging between Rs 25 crore and Rs 100 crore,” said Abhijit Ray, co-founder and managing director of Unitus Capital.

Recently, when Bangalore-based non-banking finance company Janalakshmi Financial Services announced it had raised Rs 325 crore through Series D primary equity, some of the biggest names in PE took interest in the deal. It was one of the biggest PE investments in MFI in recent times. “We did get more offers for equity investment than our demand,” said V S Radhakrishnan, managing director of Janalakshmi.

Morgan Stanley Private Equity Asia led the Janalaskshmi transaction and Tata Capital Growth Fund and QRG Enterprises, the promoter holding company of Havells India, also participated in the round. The existing investors — Citi Venture Capital (CVCI Private Equity), India Financial Inclusion Fund and Vallabh Bhanshali — also participated.

This apart, some of the other recent PE investments in MFIs include Grameen Financial Services Pvt Ltd, which raised Rs 53.2 crore of equity funding and Satin Creditcare, which raised  Rs 41 crore through equity.