Extended bull run will help privately held firms: Vencaps

Funds no longer find public sector valuations attractive

The continuation of the current bull run will spell news for privately held companies. With the market moving towards historic highs, private equity funds operating in India no longer find private investment in public enterprise (PIPE) valuations attractive.

"The current bull market will force private equity funds to make the tradeoff between value and exit," said Sanjiv Kapur, head-Asian private equity, Henderson Private Capital.

"While PIPE deals will continue to take place, there is greater likelihood of investment in private companies rather than public companies if the bull run continues in the next 6-12 months," Kapur added.

While the number of PIPE deals has remained at the same levels through 2003 and 2004, money flowing into PIPE deals has declined.

Private equity funds pumped in $521.88 million into PIPE deals in 2003 against $323.69 million this year across 11 deals, according to the Asian Venture Capital Journal.

The earlier downturn in the capital markets made investments in listed companies attractive because of low valuations.

"Companies were not able to raise money from the capital markets. That's where private equity came into the picture," says Sunil Chandiramani, partner, Schroder Capital Partners.

Some of the significant PIPE deals that have taken place till date include Temasek's $200 million investment in ICICI Bank for a 5.2 per cent stake, Newbridge Capital and Temasek picking up a 40.3 per cent stake in Matrix Laboratories for $192 million and Warburg Pincus' $148.6 million investment in Moser Baer India for a 12 per cent stake.

According to Kapur, some of the sectors in which unlisted companies will attract private equity money include infrastructure, retail and real estate.

From a private equity point of view, there are several benefits to investing in unlisted companies at this stage.

According to Darius Pandole, COO, IDFC Asset Management Company, it is easier to negotiate preferential terms and conditions when investing in an unlisted company. "You also don't have to deal with minority shareholders," he adds.

In a PIPE transaction, the private equity investor would have to make an open offer to public shareholders if its stake breaches 15 per cent under the terms of the Sebi Takeover Code."

The private equity fund would want its money to go into the operations of the company instead of buying out the public," says Premal Parekh, director, M&A, Ernst & Young.

The biggest benefit of course is exits. Unlisted companies are relatively unhindered by market regulations on how liquidation proceeds will be distributed among their shareholders.

"All indications to the market is that listing means painful existence," says Somasekhar Sundaresan, partner, J Sagar Associates.

Once listed, the law discourages exit from the stock exchange as well. Delisting guidelines make it very onerous and painful to get delisted, he says.