Bangalore: Venture capital (VC) fund Sequoia Capital’s exit from Kerala-based non-banking financial company Manappuram General Finance and Leasing Ltd two weeks ago is just the beginning of an avalanche of high-return exits lined up for this year.
Nearly half a dozen VC and private equity (PE) firms Mint spoke with are preparing for at least a dozen portfolio exits as they reach the end of their investment horizons, and to cash in on an improving economy. Overall, experts see at least 50 exits over the next six-nine months.
India has never seen more than 20 VC exits in a year. But in the first three months of 2010 alone, there have been 10 VC exits against three last year, according to research firm Venture Intelligence.
The flood of profitable exits, experts say, would help further establish India as an investment destination for VCs and PE funds.
Sequoia picked up returns of five times from its Manappuram exit and is estimating returns of eight times from its high-profile portfolio company SKS Microfinance Ltd, India’s largest microcredit firm that’s set for an initial public offering (IPO) in July. Sequoia is the largest shareholder in SKS.
“Manappuram exit is just a beginning. It is one of the many exits slated to come,” said Sumir Chadha, managing director of Sequoia Capital. “We have quite a few investments from the WestBridge portfolio and would look at exits from that set.”
Silicon Valley-based Sequoia Capital had merged with WestBridge Capital Partners in 2006, which fetched it some 20 firms, including AppLabs Technologies Pvt. Ltd, Indecomm Global Services, People Interactive (I) Pvt. Ltd and Dr Lal PathLabs Pvt. Ltd.
Chadha declined to name the firms Sequoia wants to exit from, but an investment banker close to the matter said the VC fund is considering exits in Indecomm, GlobalLogic Inc., Tarang Software Technologies Pvt. Ltd, Just Dial and AppLabs.
Also See Cashing In (Graphic)
Indecomm, AppLabs and Dr Lal are expected to bring returns of four or five times, he added, requesting anonymity. These firms couldn’t immediately be reached for comment.
VC funds typically have investment horizons of five-seven years and start looking for exit options after that to be able to hand out returns to their limited partners (LPs)—the main investors in any VC or PE fund.
After the downturn dried up opportunities for VC and PE exits in 2009, the equity market is more receptive to primary issuances now. Also, LPs are demanding returns from the flurry of investment activity that happened in 2005-07.
“Investors overall are cautiously optimistic and are celebrating exits, not only their own but in general, since that will help answer a key question/concern of investment pundits globally—is India over-hyped or will it actually translate into significant returns for venture investors,” said Mohanjit Jolly, executive director of VC firm Draper Fisher Jurvetson India.
Bangalore-based Ojas Venture Partners is in the early stages of structuring its second exit for the last two months. “The company is busy in finalizing an acquisition, so our exit process has been prolonged a bit,” said Rajesh Srivathsa, managing partner at Ojas.
Zephyr Peacock India is also lining up its second exit, talking with strategic buyers for its New Delhi-based portfolio firm, the name of which it refused to disclose. “More (such) strategic deals would happen as at times they offer better deals than the public market,” said Mukul Gulati, managing director of Zephyr.
Also in queue for exits are Kotak Private Equity Group (KPEG) and Standard Chartered Private Equity Ltd (SCPE). KPEG is working on a couple of exits this year, said chief executive Nitin Deshmukh. SCPE plans to list at least three firms in the second half of the year, said managing director Nainesh Jaisingh.
Deshmukh and Jaisingh refused to divulge the names of the firms they want to exit from, but an investment banker close to developments at the two PE funds said the firms likely to see exits from Kotak’s portfolio are Siro ClinPharm Pvt. Ltd, Metahelix Life Sciences Pvt. Ltd and BVG India Ltd, and Endurance Technologies Pvt. Ltd from SCPE.
Both PE firms could see returns of two-four times from these exits, he said, also requesting anonymity.
“I would not be surprised if there are at least 50 PE exits over the next six-nine months,” said Vikram Utamsingh, executive director at audit and consulting firm KPMG India Pvt. Ltd. “Some really big exits will happen this year, with returns in the range of 5x to 8x (five-eight times) or even 10x.”
The secondary market is also expected to keep the exit momentum going. “I think a secondary market for PE deals is likely to evolve,” said Jaisingh, “...as small companies may not be ready for IPO or may have illiquid stocks, and PE investors may reach the end of their investment horizons.”
Graphic by Ahmed Raza Khan/Mint