Mumbai: Private equity (PE) funds are increasingly opting for secondary market and strategic sales as avenues of exit, in addition to the more traditional initial public offering (IPO) route, as they seek the best returns on investment while valuations remain strong.
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Among the leading firms moving to exit investments are Kotak Private Equity Group, Jacob Ballas Capital India Pvt. Ltd, Tano India Advisors Pvt. Ltd and BTS Investment Advisors Pvt. Ltd.
Indian PE deals declined to 232 deals worth $3.8 billion in 2009 (Rs17,556 crore today), from $10.2 billion through 441 deals in 2008. Last year saw 83 exits worth $2.3 billion, compared with 36 exits worth $4.46 billion in 2008.
The rush to offload stakes also stems partly from the fact that a sale ensures immediate returns, whereas an IPO might take as long as 6-12 months and even then, a PE firm might only make a partial exit.
The performance of the markets has also driven such sales. The Sensex, Bombay Stock Exchange’s key barometer, fell to a low of 8,451.01 points in November 2008 before rebounding in 2009, when it gained 114.02% to reach 17,464.81 at the end of December.
“When the markets are buoyant, secondary sales provide good returns,” said Bhavesh Shah, executive director at JM Financial Consultants Pvt. Ltd. “Strategic sales can fetch good returns, especially if a larger deal is possible with the buyer getting a controlling stake.”
Almost 50% of the 2009 exits were through public sales when fund managers took advantage of increased buoyancy in the stock market.
Of the total number of exits in 2009, 43 were through public market sales compared with seven in the previous year, and 13 were through strategic sales compared with nine in 2008, according to data from Venture Intelligence, a research service that tracks PE, and mergers and acquisitions. IPO exits clocked in at 17 in 2009, from 10 in 2008.
BTS Investment Advisors, a Mumbai-based PE firm managing two funds for small and medium enterprises worth a total of $97 million, plans to exit at least four of its investments, said managing partner K. Srinivasan.
Kotak Private Equity also plans to exit about five of its portfolio firms this year, said a senior executive, who declined to be named because the deals are in process.
“Strategic sale is emerging as a strong option of exit, this more so from international companies who now want to expand their presence in India,” said Hetal Gandhi, managing director of Tano India. “In fact, some of our companies have got interest from foreign investors and we are in early stages of discussions with them.”
Gandhi attributed the phenomenon to the fact that entrepreneurs are also now looking at such sales as being more favourable because of strong valuations.
Sandeep Naik, principal at Apax Partners India Advisers Pvt. Ltd, said his firm had encountered a few deals, especially in the pharmaceutical sector, where a multinational company looking to establish or expand its presence in India would take a minority stake in an Indian company.
The foreign company “would look to have an option to convert it into a majority stake in the future”, he said. IPOs have not been entirely discarded as an exit strategy as these also help in preparing for stake divestment, especially when the market is expected to remain buoyant, he said. Nearly one-third of IPOs in the December pipeline were PE-backed.
“We all know that several companies were IPO-ready last year, but the markets were not very active,” said Srinivas Chidambaram, managing director of Jacob Ballas Capital. “We have some companies in our portfolio which will go for an IPO.”
“While there was a backlog created due to the financial meltdown, now there is a cautious return to normalcy,” said Shah of JM Financial.
Srinivasan of BTS Investment Advisors said exits— whether strategic or market-based—are an intrinsic part of the PE business. “If you need to go for fund-raising, you need to work on your track record and show some exits,” he said.
Part of the rush to exit is also due to overseas limited partners—investors in PE funds—that have received lower investment returns because of a global economic slowdown and will have less money to commit to funds unless the exit market improves, according to a report by Preqin Ltd, a London-based research firm focusing on alternative asset classes.
Another trend that Naik of Apax Partners points to is of inter-PE firm stake sales. “We may start seeing a wave of sponsor-to-sponsor transactions where a new set of PE ownership enters the company and supports it in its next lifecycle of growth,” he said.
Recently, New Enterprise Associate (India) Pvt. Ltd and Jacob Ballas Capital India bought Carlyle Group’s stake in Financial Software and Systems Pvt. Ltd, a Chennai-based electronic payments processing firm.
In 2001, Carlyle had invested $10 million in the company and had a 34% stake in it after subsequent rounds of funding. The PE arm of Goldman Sachs has also been looking to sell its investment in Punjab-based food company Cremica Group to other PE investors since February 2009.
Graphic by Ahmed Raza Khan / Mint