The fall of two global financial behemoths — Lehman Brothers and Merrill Lynch — is expected to dent India Inc's ability to raise resources via the equity route. Experts feel that such events significantly increase the risk perception, which in turn will put all future investments by institutional investors such as pension or endowment funds, on the back burner.
While the public issue market has already dried up, the private equity funds are also becoming conservative in terms of pricing. This is resulting in either inordinate delays in concluding deals or transactions being called off.
“The environment is more risk averse and raising resources is becoming tougher,” Sanjay Agarwal, managing director, Deutsche Bank Investment Banking, said.
There are many instances of private equity fund managers refusing to go ahead with deals after signing the term sheet. Sources said that a leading fund conducted due diligence on two companies in the last fortnight but did not close either deal primarily because of the developments in the US, their home country, said a leading investment banker on condition of anonymity.
“There are 300 PE funds with a collective war chest of more than $10 billion, which are scouting for investment opportunities. However, due to the volatility, pricing has become a key issue, which in turn is delaying transactions,” Ravi Sardana, vice-president, ICICI Securities, said.
More than a dozen companies such as Reliance Infratel, JP Power Ventures and MCX, which were cumulatively raising over Rs 25,000 crore, have deferred their plan even after getting Sebi’s approval. A majority of these companies are in various stages of discussions with PEs to raise resources.
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Even the proposed Rs 2500 crore initial public offer of Future Capital Ventures may be delayed as institutional investors are reluctant to take exposure, feel experts.
"Indian promoters will have to adjust to new expectations," the head of a leading private equity fund said. “In the given market, prices are expected to correct by at least 20 per cent,” he added. Since foreign investors constitute a majority of the investment in Indian companies, the turmoil in the US is bound to affect the fund flow either through public issues or private placement in Indian companies, said a leading banker.
The crisis faced by Merrill Lynch and Lehman Brothers is expected to have a cascading effect on PE firms too. Experts feel that the realty sector is expected to be hit the most by this crisis. “Merrill Lynch and Lehman Brothers have significant exposure and commitments in the Indian realty sector,” said a banker.
Therefore, the concerns in this sector are more pronounced,” said a banker.