Investors doing both through diverse routes; trend likely to gather steam
The 2010 calendar year is being described as the best for private equity (PE) since 2007. As capital markets return to their former glory, things gave got better for PE investors.
This year, many will make their limited partners happy. PE exits for the first nine months of the year stand at $3.5 billion in 109 deals, according to deal tracker VCCEdge. This year could see the highest-ever exits by PE investors, crossing the exit value of $3.66 billion touched in 2008.
“Private equity investments in India are maturing. There are more investments lined up for exits. In the next six-nine months, we can see more exits,” said Pankaj Dhandharia, national director, Ernst & Young.
Exits by PE players were through various routes. While buybacks amounted to $1.5 billion in 12 deals, open market sales accounted for $661 million in 45 deals. Initial public offers accounted for $623 million in 13 deals.
Good RoE
“PE investors who have been investing in the 2004-06 period are clearly finding the environment highly suitable for profitable exits. The number of PE-backed IPOs this year and the number of exits via public market sales this year seem to suggest the trend will continue for the next few months,” said Arun Natarajan, founder and CEO of Venture Intelligence.
The trend of exits could pick up, as PE investors are also sitting on good investments, which prospectively have given very high returns. This lucky pack includes SAIF Partners, Helion Ventures, Sierra Ventures and Tiger Global. They have invested in Makemytrip.com, a travel portal. The portal listed last month on the Nasdaq and the stock is trading at a premium of 171 per cent.
Sequoia Capital partially exited SKS Microfinance during its IPO in June. The stock is trading at a premium of 35 per cent to the issue price.
Out of the 14 PE-backed companies which listed in 2010 with PE interest, the stocks of 10 are trading at a premium, such as IL&FS Transportation Networks, DB Corp and Gujarat Pipavav Port. The average premium of 14 companies is 57 per cent, higher than the 25 per cent average return that PE players get.
| EXIT GAINS | ||||||
| 2008 | 2009 | 2010 | ||||
| Exit Type | Exit volume | Exit value ($mn) | Exit volume | Exit value ($mn) | Exit volume | Exit value ($mn) |
| M&A | 29 | 2,851 | 14 | 166 | 26 | 623 |
| IPO | 2 | 5 | 3 | 72 | 13 | 447 |
| Open Market | 15 | 171 | 73 | 1493 | 45 | 661 |
| Buyback | 4 | 67 | 6 | 500 | 12 | 1,500 |
| Secondary Sales | 10 | 672 | 8 | 105 | 13 | 270 |
| Total | 60 | 3,766 | 104 | 2,336 | 109 | 3,501 |
| Note: Exit volume in numbers and value are in $ million Source: VCCEdge | ||||||
Along with exits, PE investors have recorded higher investments as well. For the first nine months, the PE investment in India was $6.5 billion, which grew by around 50 per cent from $4.4 billion in the whole of 2009. This number, too, could go up this year.
“When the markets go up, the number of deals rises, as companies are more willing to raise equity and the deal flow is up. But deal closures will become difficult due to valuation expectations of promoters,” said the PE head of a large private bank. The high valuation demanded by promoters was one reason why PE deal-making was very low last year.
Lag on deal value
Some experts maintain that the sudden rise and fall in the capital markets might not have any immediate effect on valuations. “PE transactions take a long time to negotiate. Stock markets are driven by emotion and there could be short-term fluctuations as well. PE transactions are well researched and are rational decisions. But if stock markets remain high for a long time, promoters expect the best of deals,” said Rahul Bhasin, managing partner, Baring Private Equity Partners.
Experts say promoters always had high valuations in mind, even when the stock markets were down. Now, since investor confidence has picked up, more deals are likely to happen this year, they say.
Along with giving them an exit avenue, the large number of IPOs lined up this year and the next indicate a huge opportunity for pre-IPO placement and private investment in public equity (PIPE) deals. Mobile handset maker Micromax received a pre-IPO investment of $43.5 million from Sequoia Capital, Sandstone Capital and Madison India Capital Advisors last month. IDFC Investment Advisors invested $5.5 million in DQ Entertainment in February and Catamaran Investments put $6 million in SKS Microfinance.
India already has a high percentage of private investment in public equity, around 30 per cent. More such investments in this area, experts say, will depend on how the stock markets perform. “The number of PIPE deals might come down if the market gets soppy,” said Bhasin.
While cautiousness might prevail in public enterprise deals, experts say the basic fundamentals of economic growth and increase in capital demand will drive PE deals. “The economy is doing well and since investor confidence is high, there will be many deals, both large and small. The situation looks like it can get only better from here,” said Dhandharia.
