Mumbai: The volume of private equity (PE) deals in India is down by 47% in the first 10 weeks of 2008 over the year-ago period,?but buyers say they are expecting cash-hungry companies with sharply lower valuations to line up in front of investors following severe declines in stock markets.
They say that deal activity will pick up in the next two-six months.
Until December, India’s capital markets had been a big competitor to PE. But, now, the capital market option has contracted sharply, stalling plans by many companies to raise funds.
While it rose on Tuesday, the Sensex, the benchmark index of the Bombay Stock Exchange, has fallen about 27% since the beginning of 2008. In 2007, it had risen by 47%.
“Companies are (now) more serious on private equity,” said Renuka Ramnath, managing director and chief executive of ICICI Venture Funds Management Co. Ltd, the PE arm of ICICI Bank Ltd.
Other investment bankers, promoters and PE fund managers say PE will benefit from a rising, unmet demand for funds from companies still keen to make medium to long-term bets on India.
Serious valuations: ICICI Venture CEO and managing director Renuka Ramnath says companies are now more serious on private equity. (Kedar Bhat / Mint)
“We expect to see increased private equity transactions happening in India,” said Richard Heald, partner and managing director of NM Rothschild and Sons. “During this period (of declining stock valuations), there will be more PIPE (private investment in public equity) transactions happening globally.”
There seems to be a rule of thumb among PE investors that promoters of private companies take about three-four months after a down-side change in the capital markets to adjust on valuations. And a full adjustment will happen only for fund-raising decisions made if promoters are convinced that this is a down market.
“Obviously, this is not the time for raising funds or initiating public issues,” says Madhu Terdal, executive vice-president (international business division) of Bangalore-based infrastructure services company GMR Group. “Certainly, private equity firms will be doing more business at this point of time. Companies that are desperate for funds may opt for private equity funding. For this, they will have to compromise on valuations.”
Shashi Kiran Shetty, chairman and managing director of Allcargo Global Logistics Ltd, which struck a $60.5 million (Rs246 crore) deal in February with the US-based PE firm Blackstone Group Lp. for 10.4% equity stake, said his firm chose this route “as we were expecting the markets to remain volatile”. Other options such as qualified institutional placement (QIP) “come with lot of attached cost and time,” Shetty said.
PE fund managers say the declining Sensex will make investments more attractive as valuations go down in contrast to the second half of 2007 when valuations were considered to be high.
Investors looking for deals had blamed this rise in valuations on many new PE funds that entered India and were eager to strike deals even as the Sensex continued to soar.
Still, not everyone sees immediate changes, especially in valuations of private companies.
“Deal prices remain high,” said John Levack, managing director of Electra Partners Asia Ltd, an arm of UK-based private equity firm Electra Pvt. Equity Plc. Electra, he said, will stay away from the Indian market and concentrate on deal opportunities in some other Asian markets in the short term.
More pre-IPO deals
In addition to potential rise in investment in private companies, PE investment in public companies is also expected to go up. PE funds are likely to make more investments in advance of companies listing on the capital markets—called pre-IPO (initial public offering) deals.
Manu Punnoose, chief executive of PE fund Subhkam Ventures, added that “PE will get larger stakes (in pre-IPO deals)…but the holding time will be longer.” In the past, pre-IPO deals were exited not much later than the one-year holding period required for investments other than QIP placements, but now it could be three-four years.
The story is similar for private investment in public entities. “PIPE deals should increase,” said Nitin Deshmukh, head of Kotak Private Equity Group. “From a momentum play, we are getting into a value play.” Although Deshmukh largely stayed away from PIPE deals, he will be looking at those deals as the capital markets slide down. But, again, the holding periods will likely be longer.
Going by the Indian capital market regulator’s price formula, a buyer is required to pay the higher of the 26-week average or two-week average stock price of a company for such deals and PE funds funds are not likely to pay a premium over that.
“The Sebi (Securities and Exchange Board of India) pricing formula will be higher than the current market price which may cause some constraints in the next two-three months, but more PIPE deals will happen,” said Ajay Relan, managing director (region head, India) of Citi Venture Capital International (CVCI), which invested in public steel maker Jai Balaji Industries Ltd in December.
PE investors may also employ various deal structures to help protect against poor market conditions, such as convertibles that get them more shares to compensate for lower profitability.
Dimple Sanghi, executive director at Indivision Investment Advisors Ltd, the private equity (PE) arm of Future Capital Holdings Ltd, is more conservative and said there could be more deal activity, but promoters and PE investors are “waiting and watching” now. She said PE investors will be looking for the bottom, while promoters will be looking for a market bounce-back.
In a few months, both will take their call on where the market has landed. Sanghi expects six-eight months before a pick-up on the short side, and up to 12 months on the longer side.
P.R. Sanjai contributed to this story.