As declining portfolio value clips the market valuations of many firms, the secondary private equity market has swung into action. Exit options such as initial public offering (IPO) have dried up in the last three months, leading to secondary market sales emerging as a viable option for private equity players, feel market analysts.
Secondary deals in the private equity (PE) parlance refer to instances where a PE or LP (limited partnership) firm buys out the stake of other PE/LP firms.
According to Rupali Vasudev of market research firm Evalueserve, “Although the secondary market has been present in the PE/LP and venture capital space, it is only recently that a lot of attention is being focused on it. There is a paucity of exit avenues and, hence, many firms are looking to liquidate their investments through secondary sales.”
Vasudev notes that tightening of liquidity has also resulted in PE and VC firms looking for partners who can put in “top-up” funds in their portfolio company to ensure that the company continues to grow. “Almost all major institutional investors follow an asset allocation strategy. However, their portfolios have become PE overweight as the valuations of their liquid assets have fallen. They are selling their PE investments to rebalance their portfolio,” she said.
The market is yet to mature in India, though the Indian PE players have not been slow to hitch their portfolios onto the secondary bandwagon. Arun Natarajan of private equity research firm Venture Intelligence tracked at least 17 prominent secondary market deals between April 1 and June 10 this year. These 17 deals were worth $134 million compared to just eight deals worth about $70 million in the preceding three months since January.
Prominent secondary market deals since April this year include ChrysCapital offloading a third of its holding worth $60 million (about Rs 300 crore) in Shriram Transport Finance to ICICI Prudential Life Insurance in May; and Citibank Venture Capital India exiting Lupin Labs and HT Media by selling stakes worth Rs 96 crore and Rs 69 crore, respectively.
In March, Merrill Lynch Capital offloaded a 3.6 per cent stake in IT firm MphasiS to Baring India PE Fund for $25 million to improve its liquidity position. Baring PE now holds 12.21 per cent stake in MphasiS. “These were cases where the investors generated multiples of what they originally invested. These PEs could have done their sell-offs in the primary market, but would not be able to generate the kind of bulk volumes which the secondary market gave them,” Natarajan said.
PE firm 2i Capital, which has been steadily divesting its holding in freight wagon manufacturer Titagarh Wagons, offloaded stocks worth $4.5 million (Rs 21.6 crore) till date, said market sources. Last week, ICICI Venture is understood to have divested its holding in a healthcare firm in which it had invested way back in 2001.
Experts note that PEs with 3 to 5-year exit windows are finding the primary market too subdued to boost their portfolio valuations.
