Investment by private equity (PE) firms has declined by 22.9 per cent in calendar year 2008 as most international funds were wary of investing in equity markets on depleting valuations of listed stocks, which has led to fewer public offers, thereby denying an exit route.
PE investors put $10.79 billion in 399 deals during 2008 calendar — a decline of $3.2 billion compared to $14 billion invested across 439 deals in 2007.
According to Arun Natarajan, Managing Director and CEO of Venture Intelligence, the decline in PE investment is primarily because of the sharp decline in equity prices.
PE firms have lost heavily on private investments in public equity (PIPE) deals in 2008 — a value erosion of $0.89 billion (around Rs 4,400 crore) or 53.3 per cent out of $1.67 billion invested in 31 deals. The loss from the 65 PIPE deals of 2007 has been 40 per cent or $2.04 billion out of the deal size of $5.16 billion.
In 2008, PE firms got exit routes for 31 of their investments, including nine via IPOs, in Indian companies. In 2007, PEs had witnessed 65 liquidity events, including 16 via IPOs. The $240 million raised by Hyderabad-based power project development company KSK Energy Ventures via its June IPO was the largest by a PE-backed firm in 2008.
However, despite a weak secondary market and a complete shutdown of exit route, PE deal makers may be back in action in 2009-10, indicates Natarajan. He expects many big-ticket PE deals in 2010.
In 2008, the two big-size PE deals were the $640 million raised by Aditya Birla Telecom (ABTL) from Providence Equity Partners and the $395 million mopped up by Indiabulls Power Services from Farallon Capital and Lakshmi Mittal-promoted LNM India Ventures.
| FACT SHEEAT Top 5 deals in listed companies in 2008 | |||
| Company | Amount $ | Investors | % loss |
| Axis Bank | 312.90 | Orient Global | -86.39 |
| Cairn India | 273.43 | Orient Global | -30.67 |
| Mahindra & Mahindra | 172.63 | Goldman Sachs | -56.48 |
| Apollo Hospitals | 106.76 | Apax Partners | -28.60 |
| M & M Finan Serv | 104.04 | TPG, Stan Chart | -38.67 |
Natarajan expects large PE funds such as the Carlyle Group and the Blackstone Group to invest now as secondary market valuations have become very attractive.
Foreign Currency Convertible Bonds (FCCBs) provide big opportunities to PE funds as they are trading at huge discounts. PE firms may approach these companies to buy shares if they agree to reset conversion price.
According to data collated by Venture Intelligence, the total value of merger and acquisition (M&A) transactions providing exit to PE investors during 2008 was just over $1.2 billion. These included eight strategic sales, seven secondary transactions, five sales via public markets and two buybacks.
The largest M&A deal providing an exit during 2008 was HSBC’s $260 million purchase of listed brokerage IL&FS Investsmart. In November 2004, SAIF Partners had acquired a 20 per cent stake in IL&FS Investsmart for about $8 million. SAIF made around $35 million from the sale of this stake.
In March, Thomas Cook UK (TCUK) acquired listed travel services company Thomas Cook (India) from Dubai Financial Group, a subsidiary of Dubai Investment Group. TCUK is paying $234 million for Dubai Financial Group’s 60 per cent stake which they had acquired in Thomas Cook India from TCUK in December 2005 for $120 million.
