BackPE funds eager to take IPO route to exit investments
PE funds have been finding it tough to exit investments in the past couple of years as depressed markets brought down returns
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Mumbai: The uptick in the primary markets has led to many firms backed by private equity (PE) funds lining up to go public. But some funds have more at stake than others and are eager to take the intial public offer (IPO) route to exit investments with success.
According to a Mint analysis, three funds—Norwest Venture Partners, Blackstone and IFC—have the most riding on the primary markets, with at least three portfolio firms each coming up with IPOs.
So far this year, eight companies have completed their IPOs, while another 22 companies have filed draft IPO papers. A majority of them are PE-backed firms.
PE funds have been finding it tough to exit investments in the past couple of years as depres-sed markets brought down ret-urns and extended the lifecycle of PE investments in India.
According to a 1 July McKinsey and Co. report, the average return from exits has dropped to just 7% since 2008 compared to 21% until 2007. The average holding period of investments has gone up from 3.3 years in 2005 to 5.7 years by 2013.
The IPO market appears to be the best exit route for PE investors in the current scenario, said Harish H.V., partner at consulting firm Grant Thornton India Llp. “As far as PE-backed IPOs are concerned, the ones which are coming to the market are fairly large ones, where PEs have put a reasonable amount of money in the companies. Secondary exits, where possible, have already happened. Promoter buyback is not an option," he said.
Funds that are nearing the end of their lifecycle are chasing exit routes through IPOs more aggressively, said an investment banker who did not want to be identified. “Clearly, some funds are more actively chasing the IPO route than others. Especially, funds which are nearing their lifecycle, those which have stuck investments from their older funds or those which are raising new funds and want to show successful exits to their investors," the investment banker said.
Fund managers say that over the next few years, IPO exits may gain traction over secondary market transactions, which involve selling an investment to another fund. “We expect that over the next year or two, there will be a higher number of IPOs being undertaken by PE-backed companies. This will take place on the back of continued interest in India from global investors coupled with the compulsion for PEs in India to show exits on investments that have reached their targeted investment time frame," said Darius Pandole, partner at PE fund New Silk Route (NSR).
NSR has so far this year taken two portfolio companies public—Ortel Communications Ltd and VRL Logistics Ltd. Coffee Day Enterprises Ltd, anorther investee company of NSR, has filed draft IPO papers.
According to Sohil Chand, managing director at Norwest Venture Partners, the fund’s IPO pipeline is a function of its investment plan. Norwest has four IPOs in the pipeline as of now.
“These companies in which we invested in, whether it is Sadbhav, Thyrocare or RBL Bank, our thesis was that these companies would go public. Given the market conditions, we think that this is the right time to take these companies to the market and list them," said Chand.
In the case of infrastructure company Sadbhav Infraprojects Ltd, Chand said, IPO might be the only exit route. “While there is traction on the M&A (mergers and acquisitions) side, it is very sectoral. There are hardly any M&A in the infra space," he said.
But public listing works only in the case of certain companies, said Pandole of NSR, as its success depends on providing long-term investor returns. “It can only with companies that provide a combination of a strong management, a scalable business model with the requisite governance and a reasonably priced initial offering," he said.
PE funds are hopeful that the primary market window would remain an exit option for some time.
“If corporate results start showing the improvement that is widely expected, then it is likely that the primary market window will remain open for a longer period than in the past few years," said Pandole.
IFC and Blackstone did not respond to an email questionnaire asking about their exit plans through the IPO route.
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