Mumbai: Hong Kong-based private equity firm NewQuest Capital Partners expects to invest about $140 million—nearly a third of its $400 million corpus fund—in India, hoping to capitalize on the so-called secondary opportunities in the country.
A secondary deal refers to when an investor buys stake in a company from an existing investor. It’s an alternative to traditional stake-sale routes for private-equity (PE) investors such as public issues of shares and mergers and acquisitions (M&A). In developed economies, 30-50% of such exits are through secondary deals, whereas in Asia, this percentage is still in single digits.
With a lethargic public offerings market, PE firms have become keener about trading stakes among themselves. Also, many investments are reaching the ends of their investment cycles, raising the possibility of increased activity in secondary deals, which currently form barely 5% of the PE investment space in India.
“We are increasingly seeing that secondary deals are more or less becoming the order of the day in the absence of a credible and sustainable capital market,” said K. Ramakrishnan, executive director, Spark Capital Advisors (I) Pvt. Ltd, an investment bank. “M&A is difficult to execute.”
Amit Gupta, partner and head of the India business at NewQuest, said his firm is evaluating a number of potential secondary deals in both listed and unlisted entities across sectors in India, except in real estate. “We are in the final stages of due diligence for a couple of deals in India,” he said.
According to him, 1,500-2,000 investments were made in India between 2006 and 2011, and “we believe 20% of them are ripe for exits”, Over the next three-five years, investors will be looking for returns from nearly all these deals, he said, adding, “Some of these could be through trade sales, capital markets, strategic alliances… a lot of them would be through direct secondaries.”
NewQuest was established in 2011 from the spin-off of Bank of America Merrill Lynch’s non-real estate private equity portfolio in Asia. The PE firm’s mandate is to invest across Asia-Pacific with a particular focus on emerging economies such as China, India and the other Southeast Asian countries. It expects to invest 40% of its corpus in China, 30-35% in India and the rest in other parts of Asia.
NewQuest’s current India portfolio includes a logistics company, a software and systems design company, and a fertilizer manufacturer.
Gupta said his firm will explore buying stakes in firms three to five years after the original investment. “As we are broad-based, the average ticket size would be between $5 million and $60 million. This range covers 80% of investments in India,” he added.
This year has seen one of the largest secondary transactions in India. In August, Bain Capital Partners Llc announced its decision to buy a stake in outsourcing firm Genpact Ltd from General Atlantic Llc and Oak Hill Capital Partners LP for $1 billion.
In January, Olympus Capital Asia Investments Ltd put $100 million into DM Healthcare Pvt. Ltd, providing a partial exit to existing investor India Value Fund. General Atlantic bought a minority stake in logistics company Fourcee Infrastructure Equipments Pvt. Ltd for $104 million, paving the way for Mayfield Fund to exit its investment.