Private investments in public companies to increase by 70%, say experts.
Public companies, especially the small and mid-sized ones, are set to witness a flow of private equity (PE) investments following the new takeover code announced by the Securities and Exchange Board of India (Sebi), where the threshold limit for open offer will be raised from 15 to 25 per cent. The open offer limit of 15 per cent had kept back a few global PE majors who wish to acquire about 20-25 per cent stake in listed companies.
Apart from a good flow of PE investments in listed companies, experts believe the new proposal will increase deal sizes by about 70 per cent.
According to a recent study by Bain & Company, private investments in public equities (PIPEs) fell to less than 10 per cent of the deal value last year, owing to increased valuations in the capital markets and the cautious investment mindset of PE investors. "Apart from increasing public market valuations that inflated valuations, regulatory obstacles also dampen PE investors’ enthusiasm for PIPEs," the report said.
| TOP PIPE* DEALS IN 2011 | ||
| Target |
Buyer | Value ($ mn) |
| Welspun Corp Ltd | Apollo Management | 287 |
| Magma Fin Corp | IFC, KKR | 98 |
| KPIT Cummins | ChrysCapital | 25 |
| Aegis Logistics | Infrastructure India | 15 |
| *PIPE: Private investments in public equities | ||
Senior partner and CEO, AZB & Partners, Abhijit Joshi said, “The increase in trigger threshold to 25 per cent paves way for a sizable consolidation and will increase private equity activity.”
Gaurav Deepak, co-founder and managing director, Avendus Capital, echoes Joshi's view. "Though PE fundraising was not tough for private companies, public companies face difficulties because of the 15 per cent barrier for open offer. However, listed space will witness more PE deals once the proposals implemented," he said.
The increasing valuation of listed companies is reflected in the number of PIPE deals took place in last four years. According to data from VCCedge, 2010 witnessed 23 PIPE deals worth $457 million against 47 PIPE deals worth $3 billion in 2007. About 14 PIPE deals ($300 million) took place in 2008 and 26 ($720 million) in 2009.
This year witnessed 15 PIPE deals worth $460 million so far. And also witnessed one of the largest deals, where US-based Apollo Management invested $286 million in Welspun Corp Ltd. The overall deal size comes around $500 million.
Dinesh Dua, CEO, Nectar Lifesciences Ltd, a BSE-listed company with Rs 537-crore market capital, said, "For mid-sized companies, instead of clubbing various options such as PE, global depositary receipt (GDR) for fundraising, new threshold of 25 per cent, fundraising can be done easily through a single route of PE."
In a few cases of mid-cap firms where PE firms are not keen to acquire the minority stake which will be too small for them by value, 25 per cent open offer limit will bring more investments, he said. Last year, New Silk Route Partners invested $55 million in Nectar Lifesciences Ltd by acquiring a minority stake.
Bhavesh Shah, MD, Investment Banking, JM Financial, said, "The new proposal will help expand private equity deal universe and effectively increase the potential deal sizes in the listed space by up to 89 per cent without triggering the open offer."
Gopal Agrawal, partner, Singhi Advisors, a boutique investment bank, said, "The change is good as it would not only lead to increased participation from private equity players in terms of size and value of fresh investments, but also in their existing portfolio companies ,where they would use the opportunity to increase their stake."
The increasing competition in private space, as far as fundraising is concerned, also compelled the PE companies to change focus into the listed space. Recently, four managing directors from Sequoia Capital left the company and went back to the parent company Westbridge Capital to form an independent fund that will focus on PIPE deals.
Avendus PE Investment Advisors, a unit of financial services firm Avendus Capital, is reportedly raising up to $200 million in a private equity fund to invest in mid-sized listed firms.
