US private equity firms Carlyle Group and Warburg Pincus took advantage of India's recent market gains to pare stakes in two financial companies in deals worth $440 million, a sign of investor wariness about the sustainability of the rally.
Buyout firms that invested billions of dollars during the Indian market's boom years before the global financial crisis are widely expected to look for opportunities to cash in their holdings, with more stake sales anticipated in coming months.
"We will definitely see more and more exits, perhaps most of the investments that are more than three years old, if the stock market rally continues," said Vikram Utamsingh, head of private equity advisory at KPMG in India.
Carlyle sold a quarter of its stake in top mortgage lender, Housing Development Finance Corp (HDFC), two sources with direct knowledge of the matter said, raising about $270 million and nearly doubling money from a 2007 investment.
In an unrelated deal, Warburg Pincus sold about 17.5 million shares in lender Kotak Mahindra Bank through stock market deals to raise about $170 million, three sources with direct knowledge of the matter said.
The two share sales came after the BSE Sensex jumped 11% in January, its first rise in three months, and the strongest month since September 2010. It was the best January for the index since a 19% rise in 1994, and the rally was mainly led by financial stocks.
India's stock market dropped nearly 25% in 2011, making it one of the worst global performers and leaving few options for private equity firms to exit from their portfolio companies through IPOs or block deals.
Singapore sovereign funds Temasek Holdings and Government of Singapore Investment Corp (GIC) are looking to sell part or all of their holdings in ICICI Bank, the country's second-largest, local media recently reported.
Temasek owned 3.5% of ICICI Bank at the end of September, according to Thomson Reuters data, a stake now worth roughly Rs 3,600 crore. GIC held a 1.8% stake in the bank.
One large investor, or limited partner, in private equity funds, said returns in India have been disappointing.
"Last year was a complete washout year in terms of exits. Now GPs [general partners] are under pressure as they have to show returns of earlier investments," said the investor, who declined to be identified.
LEAN YEAR
Private equity exits through Indian IPOs dropped 66% last year to $85 million in 15 deals, according to data from industry tracker VCCircle.com.
KPMG expects that roughly $95 billion in Indian private equity investments made during the bull market years of 2006 to 2008 will come up for sale over the next three years.
Elsewhere in Asia, investment banks are counting on sales of large blocks of stock by institutional owners to bolster dwindling underwriting fees and spark the region's equity capital markets back to life.
Investment banks love block trades because they pay fees similar to IPOs but usually require less time and work.
"There's lots and lots of interest in sponsor selldowns and blocks. There's a lot of activity there and where we will focus most of our time," said an investment banker at a top global institution in Hong Kong.
DOUBLING MONEY
Carlyle, which owned about 5.2% of mortgage lender HDFC, making it the No. 2 shareholder after Citigroup with 8.8%, sold about 20 million shares at an average Rs 677.25 apiece, one source said.
The Washington-based firm will retain nearly 4% of HDFC after the deal. The sale is the first from India by Carlyle Asia Partners, a buyout fund, a source said.
At the current price, Carlyle has nearly doubled the return on its 2007 investment, one source said. Deutsche Bank was the sole manager of the block deal, sources said.
In June 2011, Citigroup sold a 1.5% holding in HDFC. That sale was done ahead of the adoption of a global accord on banking that discourages large holdings by banks in other financial institutions.
In Wednesday's second deal, Warburg Pincus sold 17.5 million shares in Kotak Mahindra, about 2.4% of the bank's equity, at Rs 490 each, said the sources who declined to be identified as the matter was not yet public.
Warburg Pincus, which manages about $30 billion globally, held nearly 6% of Kotak Mahindra, stock exchange data showed, before the block deal through two investment vehicles.
A spokesman for Kotak Mahindra Bank in Mumbai declined to comment on the deal. Warburg Pincus officials in India did not immediately respond to calls for comment.
Shares in HDFC, which the market values at roughly $21 billion, ended down 1.3% at Rs 688.90, while the BSE Sensex rose 0.6%. Kotak Mahindra gained 2.5% to close at Rs 510.95.
