Mumbai:Bain Capital Partners Llc’s Thursday announcement that it would buy a stake in outsourcing firm Genpact Ltd from General Atlantic Llc and Oak Hill Capital Partners LP for $1 billion (around Rs 5,580 crore), is another recent instance in a growing list of so-called secondary deals in the Indian market.
Bermuda-based, New York-listed Genpact began operations in 1997 as an India-based back-office services unit of General Electric Co. A major chunk of its operations is still based in India with at least 43,000 employees in the country. Bain is buying about 30% of Genpact’s stock outstanding for $14.76 a share, according to a statement. The transaction is expected to close this year.
With a somnolent public offerings market, private equity (PE) firms have become keener about trading stakes among themselves. Many of these companies are also reaching the end 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.
Roughly $95 billion worth of investments made by PE firms in India during the bull market years of 2006-08 will come up for sale over the next three years, according to a November report by KPMG, a consultancy.
“Secondary deals will be the order of the day for the PE industry,” said Nimesh Salot, director (investment banking) at Ladderup Corporate Advisory Pvt. Ltd, who is working on a few such mandates, but declined to share details. “The number of secondary deals will keep increasing as we go forward because there are not many opportunities for strategic sales and the initial public offer (IPO) market is lukewarm.”
In the seven months between January and July, 12 IPOs have raised Rs 1,368.75 crore, compared with Rs 5,966.28 crore through 37 IPOs last year. No listed firm has sold fresh shares to the public so far this year, compared with Rs 8,055.2 crore raised by two offerings in 2011.
Sonam Udasi, senior vice-president and head of research at IDBI Capital Market Services Ltd, is also upbeat about secondary deals, in which a new investor buys an existing investor’s stake. “The share of secondary deals in the entire ECM (equity capital markets) pie could be in the range of 60%-plus.”
The Reserve Bank of India added to the optimism in the space when in March it relaxed rules and allowed foreign PE and venture capital firms to pursue direct secondary transactions in India. Earlier, they were only allowed to buy primary shares in enterprises and secondary transactions were approved on a case-by-case basis. “In the coming months, secondary deals, which have less lead time, are likely to form a major chunk of the ECM portfolio,” said Sanjay Sharma, head (ECM) at Deutsche Equities India Pvt. Ltd
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Experts say pharma, media and non-banking financial companies are the most active sectors for such deals.
There are already some secondary offers in the local market.
Standard Chartered Private Equity is looking to sell its four-and-a-half-year-old investment in generator maker Powerica Ltd, including a secondary transaction, according to a report by VCCircle, which tracks PE and venture capital activity in the country.
General Atlantic is looking to sell its stake in mid-size technology services firm Hexaware Technologies Ltd through the secondary market, the CNBC-TV18 business news channel reported on 28 June. ICICI Venture Fund Management Co. Ltd, which is looking to exit from Updater Services (Pvt.) Ltd, has also seen interest being generated among PE investors. Kotak Private Equity Group and 3i Group Plc are looking to exit from their portfolio company Siro ClinPharm Pvt. Ltd.
This year has already seen two of the largest secondary transactions in the domestic PE investment space.
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, and 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.
In July, HushBabies, an online retailer of baby products, raised an undisclosed amount from IndoUS Venture Partners, when existing investor Nexus Venture Partners sold its stake.
To be sure, these deals are not easy to close and agreeing on valuation is a big challenge. The existing investors often seek a premium of 18-22% in the secondary space, although for listed firms the premium can be in the range of 5-10%.
There could also be disagreements on the rights a promoter may be ready to give up to a new investor coming through a secondary deal. Promoters are often unwilling to give the same rights that an initial investor enjoyed as a company typically migrates from being a start-up to a growth stage.
Some PE firms prefer combination deals as the primary issue of shares is important for them to be able to participate in the portfolio company’s growth. “A secondary deal coupled with primary issuance of shares by the company would work well for us,” said Sreenivasulu Srini Vudayagiri, investment director at Peepul Capital, a PE firm.
Investors generally feel more confident about secondary transactions as the company concerned is already exposed to PE investors with their representatives on its board.
However, there have been instances of a PE investor fighting with the promoters on corporate governance. For example, Lilliput Kidswear Ltd and its two investors TPG and Bain are litigating over alleged financial irregularities. The two global funds had bought stakes in the company from Everstone Capital’s Indivision in 2010.