Mumbai: Mumbai-based private equity fund Halcyon Resources and Management Pvt. Ltd has exited its investment in stock broker Anagram Capital Ltd, owned by the Lalbhai Group, the promoters of garment manufacturer Arvind Ltd. Anagram Capital was known as Anagram Securities Ltd until two months ago.
In July 2007, Halcyon, founded by two former Arthur Andersen employees, had bought an option that allowed it to purchase a 20% stake in the Ahmedabad-based brokerage, at the end of 18 months at an enterprise valuation of Rs165 crore. The option lapsed in December 2008, ending Halcyon’s 18-month relationship with the brokerage.
Options open: Narayan K. Seshadri (left), founder, chairman and chief executive officer, Halcyon Resources and Management, with Abhay Soi, co-founder and managing director of Halcyon.
“After the global meltdown in the financial services industry, we decided not to exercise the option,” said Abhay Soi, co-founder and managing director of Halcyon.
The fund was one of the few that made all its investments using convertible instruments and options, protecting itself against any downside.
The Sensex, the Bombay Stock Exchange’s benchmark index, went past 21,000 in January last year, but lost about 52% during the year following the global markets meltdown, vindicating the use of such instruments, which have now become popular among private equity investors.
In 2007, at least $14 billion (Rs68,180 crore) is estimated to have come into companies by way of private equity funding, the highest for any year, according to Venture Intelligence, a research firm that tracks private equity and venture capital deals. In 2008, such investments were to the tune of $10.79 billion across 399 deals, but in many of the deals, investors had built in clauses, making disbursement of funds contingent to the company meeting specified performance benchmarks.
After the purchase of the option, Munesh Khanna, a managing director with Halcyon, became the executive chairman of Anagram, and a Halcyon director started managing its operations. Khanna quit the fund in late 2008 to set up his own investment banking firm, Resonus Advisors Pvt. Ltd.
“It was Mr Lalbhai (referring to Sanjay Lalbhai, chairman and managing director of the Arvind Ltd) who chose to buy back the option. Mr Munesh Khanna continues to be the chairman of the company,” said Mayank Shah, chief executive officer of Anagram Capital Ltd.
Halcyon, which its promoters like to call a special situations fund, had made two other investments in 2007 and early 2008, when the equity markets were booming.
“We were reluctant to participate in that market as we didn’t see any value opportunities,” said Soi. The underlying philosophy of Halcyon, according to him, is value investing, and not growth alone.
These two other investments, too, saw Halcyon building in protection for itself in case the markets turned hostile.
“Many funds were buying directly into equity at that time, on the back of prices being cheap compared to peers, but we were looking for companies with robust businesses at intrinsic value,” Soi said.
Halcyon bought optionally convertible preference shares of Delhi-based SSIPL Retail Pvt. Ltd, a franchisee for global brands such as Nike and Levi’s, between February and July 2007.
The $8 million investment in SSIPL, which has 160 retail outlets across India, was taken at a coupon rate of 12%, with an option to convert the investment into equity at any time within 24 months, pegging the company’s equity at Rs110 crore.
“If we don’t convert, we get back our capital plus the 12% coupon (interest),” said Soi.
Halcyon also bought into an integrated sugar company in March 2008. Soi declined to name this company, but said it has a listed and an unlisted arm each and both will merge soon.
Halcyon gave a Rs35 crore loan to the listed entity at a coupon of 14%, with an option to take up to a 38% stake in the unlisted entity ahead of the merger. In this case, too, Halcyon can walk away with its principal and coupon earned if it doesn’t buy the equity.
“The key for us is to get into companies that have an inappropriate capital structure, and post-investment, make that an appropriate structure which will, among other things, enable the company to service our investment instrument (such as debt),” said Narayan K. Seshadri, founder, chairman and chief executive officer of the fund.
Others funds that used options to protect against markets turning hostile have also started exercising them.
In a 30 December article, the Business Standard reported that private equity investors DB International (Asia Ltd), Earthstone Holdings Ltd, Kotak Mahindra Capital Co. Ltd, Monsoon India Inflection and Jackson Heights Investments, which bought Rs600 crore worth of shares in a pre-IPO (initial public offering) deal in Delhi-based Acme Tele Power Ltd, had exercised their option to sell the shares back.
This means the promoter of Acme Tele Power had to buy back the shares issued to these investors since the IPO, which was expected to take place by March, had to be delayed for lack of investor appetite.
Meanwhile, Halcyon, which has exhausted only $20 million of its $300 million corpus, is in the process of churning its investors, to raise a $150 million fund, and giving investors larger co-investment rights.
“In the current scenario, when valuations are expected to be more reasonable, we are open to buying directly into equity as well,” said Soi.