In the early years of this century, private-equity (PE) firms and their investors were enthusiastic about India’s potential. Fifty percent of the country’s 1.1 billion people were younger than 30. From 2003 to 2007, GDP grew by 7.5 percent annually, 88 million middle-class households were formed (more than twice the number in Brazil), urban dwellers grew by 35 million to 330 million, and 60 percent of the population was in the labor force. Banks’ nonperforming-asset ratios fell from 9.5 percent to 2.6 percent. Further, the PE-to-GDP ratio stood at 1.8 percent, reassuring investors that India had plenty of headroom when compared with developed markets such as the United Kingdom (4.2 percent) and the United States (4.4 percent).

Private investors poured about $93 billion into India between 2001 and 2013. At first, returns were strong: 25 percent gross returns at exit for investments made from 1998 to 2005, considerably better than the 18 percent average return of public equity. But returns fell sharply in following vintages; funds that invested between 2006 and 2009 yielded 7 percent returns at exit, below public markets’ average returns of 12 percent. In fact, India’s PE funds in recent years have come up well short of benchmarks: with a 9 percent risk-free rate and a 9.5 percent equity risk premium (accounting for currency risk, country risk, and volatility), the climb for Indian PE investors is undisputedly steep. To be sure, returns are based on a small number of exits, but that in itself is a problem. Only $16 billion of the $51 billion of principal capital deployed between 2000 and 2008 has been exited and returned to investors.