2011 may witness large number of PE exits: Bain survey

India’s private equity (PE) industry is likely to record smooth exits from its investments in 2011, since most portfolio investments are ripe for exits. Nearly 800 deals made through 2007, with an investment value of about $15 billion in PE fund portfolios, are expected to exit in 2011. The holding period of investments is also likely to rise to five-seven years, compared with the current period of 3-5 years.

According to ‘India Private Equity-2011’, a study by Bain India, the high price-to-earnings ratios that PE investors in India pay, put them at a relative disadvantage to China and other emerging markets. In these countries, deals are still available for single-digit multiples. PE deals are often the last resort for promoters who cannot tap public markets and do not have access to financial institutions or debt financing.

For seven years until 2010, exit volumes were low, compared to the number of new deals. In 2010, PE funds exit 120 companies, with a volume of $5.3 billion.

In terms of the total value realised, 2010 surpassed the previous highs of 2005 ($3.7-billion exit volume) and 2008 ($3.5-billion exit volume). Though the value was lower than the peak value of 2007 ($17 billion), the total deal value in 2010, at $9.5 billion, more than doubled from that in 2009.

According to the survey, favourable exit conditions would continue in 2011, though the timing of the exits would be crucial. About half the industry participants surveyed said they expected the number of exits to rise 10-25 per cent in the near term. When asked about the scenario in 2013, just 2 per cent said they expected exits to decline, with the remaining either anticipating a stable scenario or a rise in the number of exits.

About 60 per cent of the investments made by PE firms through 2007 would be retained by them. About 10 per cent of the investments to be exit are more than or five years old. Now, after reaching the upper end of their investment holding periods, many of these holdings would soon be up for sale, according to the survey.

Over the past two years, the average investment-holding period for about 65 per cent of funds was between three and five years. The remainder held on to their assets for about five to seven years. However, about 35 per cent of participants expect an investment horizon of five-seven years, and 5 per cent feel their investments would stretch beyond seven years.

So far, the most popular exit route was public market sales, including a buoyant IPO market, which accommodated 60 new listings, corresponding to nearly half the overall exits. Strategic buyers were also back in 2010, accounting for a record 25 per cent of sales through mergers and acquisitions.

Secondary sales to other PE firms and buybacks by promoters accounted for the remainder of the deals.