Mumbai: This is a story of one port, many funds and negative returns after a decade’s wait—a long-term infrastructure story gone wrong.
A private equity (PE) fund managed by AMP Capital Investors of Australia is set to make a substantial loss as it sells a part of its investment in Gujarat Pipavav Port Ltd in the latter’s initial public offering (IPO).
It is not alone. There are quite a few other funds that are not happy with their investment in the port operator.
In a rare loss-making exit through an IPO in the infrastructure sector, the 11-year-old India Infrastructure Fund Llc will see a 27% erosion in the value of its investment if the issue, which opens on Monday, gets priced at the upper end of the Rs42-48 price band.
At this price, India Infrastructure Fund’s loss will be Rs18.45-24.45 per share.
Graphic: Yogesh Kumar/Mint
India Infrastructure Fund was launched in 1999 under a joint management agreement between AMP Capital and the erstwhile Unit Trust of India, or UTI. In 2001, the fund bought 5.9 million shares in Gujarat Pipavav Port for Rs47 crore at Rs80 apiece.
In 2007, AMP Capital became the sole manager of the fund with UTI’s exit. Subsequently, a rights issue of 2.3 million shares in September 2007 at Rs50 apiece brought the average cost of acquisition down to Rs66.45 per share.
A second fund—Infrastructure Fund of India Llc—will also offer its shares for sale in the issue. This fund too is managed by AMP Capital.
The second fund had acquired 15.2 million shares at an average cost of Rs42.85. This fund too will make a marginal loss if the issue gets priced at the lower end of the price band.
Together, these two funds will raise between Rs50 crore and Rs56 crore selling their shares, while the company will raise Rs500 crore through a fresh equity issue.
Anoop Seth, managing director, AMP Capital Advisors India Pvt. Ltd, said the fund was exiting at a loss. “The investments were made in 2001. However, since we have a strong belief in the company’s future, we continue to hold 50% of our investment.”
A senior official from UTI Asset Management Co. Ltd said his firm was no longer involved in the affairs of the two funds. UTI Asset Management was created in 2004 after UTI was restructured.
Tapasije Mishra, managing director, IDFC Capital Ltd, the book-running lead manager for the IPO, said the fact that the issue was priced below what the PE investor had paid underlines the attractiveness of the issue.
“Investors are getting it cheap. What is the problem?” he asked.
Another banker handling the deal said: “It was a closed-end fund and it’s being wound down. So, they are booking a loss to meet the redemptions.” He did not want to be named.
A PE firm usually operates a portfolio for three to five years, and then exits for a high return. PE firms prefer exiting portfolios through an IPO. Other exit routes include selling out to other investors or a strategic sale.
With the stock market rising, a number of PE-backed firms have opted for IPOs. So far in 2010, there have been 11 PE-backed IPOs, compared with two for the corresponding period in 2009 and eight in 2008.
In 2009, there were seven such exits and 10 in 2008, according to data by Venture Intelligence, a research service focused on PE and mergers and acquisitions.
According to PE investors, fund exits at a loss for two reasons—first, when a fund’s life is coming to an end; second, when it judges that the market will not support the price of the issue and it’s better to exit.
“Usually PE firms look at a 20-25% IRR (internal rate of return) on their investments. However, that doesn’t happen in each and every investment,” said Hetal Gandhi, managing direcor, Tano India Advisors Pvt. Ltd.
A couple of other funds including the Special Undertaking of Unit Trust of India will get an opportunity -- whether they use it or not -- to exit from their decade-old investments in Gujarat Pipavav Port when the company lists its shares after the public offer.
The Special Undertaking of Unit Trust of India’s investment dates back to August 2000 when the erstwhile UTI had bought shares worth Rs32 crore in the company at Rs80 a piece.
New York Life International India Fund (Mauritius) Llc also invested at a price of Rs80 a share in October 2001. New York Life and special undertaking of Unit Trust of India hold 4.7% and 1.3%, respectively, in the company.
In 2005, an infrastructure fund from IDFC Private Equity Co. Ltd, IL& FS Private Equity and Jacob Ballas Capital India Pvt. Ltd had invested in Gujarat Pipavav at Rs40 per share. Even these entities will not make substantial gains in the IPO.
Luis Miranda, president and chief executive officer of IDFC Private Equity, said: “We don’t have a lock-in. But we don’t intend to exit the investment as we are confident about its growth prospects.”