Bangalore: Investment bankers will remember 2009 as the year their industry started in a coma but recovered faster than they had foreseen after last year’s global financial market turmoil. The turnaround was so swift that as the year progressed, bankers’ fees rose by at least 15%, according to Thomson Reuters Corp. and Freeman and Co.
This, when private equity (PE) deals, a major source of revenue for investment banks, fell by around 28%. According to data from consulting firm Grant Thornton India Pvt. Ltd, PE deals in India fell to 211 in the first 11 months of 2009 from 294 in the same period the previous year.
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But then, secondary transactions or secondaries, a much talked-about liquidity-creating tool for investors in PE funds in the wake of the global credit squeeze, kicked in. In 2009, the nascent secondaries market contributed about a quarter of the revenues for investment banks.
“It’s a complete trot-to-a-gallop year in terms of deal activity,” said Srinivasan Subramanian, head of investment banking at Enam Securities Pvt. Ltd. “In the first four months, there was zero activity. And from June on, both primary and secondary markets started vibrating,” he added.
In secondary transactions, investors in PE funds, known as limited partners (LPs), sell their capital commitments or positions in the funds to other LPs. This year saw a renewed vigour in these deals as many LPs were not in a position to meet their commitments to PE funds or wanted to limit their exposure to them.
“Secondary was very encouraging this year, bringing in 20-25% business. I have a feeling that secondaries would become more meaningful next year,” said Ranu Vohra, chairman and managing director, Avendus Advisors Pvt. Ltd, a Mumbai-based investment bank. “I would attribute a lot of secondary deals to mounting pressure of LPs on liquidity.”
Deepak Srinath, co-founder of Viedea Capital Advisors Pvt. Ltd, a Bangalore firm, says secondaries can be prompted by several other reasons as well.
For instance, Viedea, which has struck three secondary deals this year, is helping a firm sell a stake in a firm it had invested in a few years ago. The investor now wants to sell the stake as its business portfolio does not match that of the investee firm.
Secondaries can also be prompted by a fund’s desire to exit from portfolio firms they have been invested in for long. “Investors of deals in 2002-03 are looking for exits due to pressure from their limited partners. This is not to say that these companies are not doing well, but funds have to exit,” said Srinath.
A fund typically looks to sell its stake in a company after five-six years as its investors start seeking returns.
Another favourite fund-raising tool, as the market rebounded, was qualified institutional placements (QIPs), or the selling of shares to institutional buyers, as the time for structuring and completing these is a quick three-four weeks.
From January to November, Indian firms raised about Rs47,419 crore through initial public offerings (IPOs), follow-on public offerings (FPOs), QIPs and rights issues, according to data by SMC Capitals Ltd, the merchant banking arm of New Delhi-based financial services house SMC Global Securities Ltd. Of this, 60.6% came through QIPs.
Between January and November 2008, QIPs had accounted for a mere 4.3% of the funds raised from the market.
“Undoubtedly, QIPs came to the rescue of cash-starved Indian companies. My guess is that this momentum will continue next year as well as companies will want to grow and will come to the market,” said Enam’s Subramanian.
In addition, some public market deals were triggered by high valuations in the private markets. For instance, Norwest Venture Partners (NVP), a global venture capital firm, bought an 8% stake in Shriram City Union Finance Ltd for Rs120 crore from Indopark Holding Ltd, a subsidiary of Merrill Lynch and Co.
“There are times when public market valuations are cheaper than private market valuations and investors will go towards safer deals where exits are also shorter,” said K. Ramakrishnan, executive director and head, investment banking, Spark Capital Advisors (India) Pvt. Ltd.
High valuations also continue to sour PE deals. “Private equity investors will compare deals in India with what other markets are offering,” said Falguni Nayar, managing director, Kotak Mahindra Capital Co. Ltd. “Given that India is an attractive investment destination for portfolio investors, valuations are higher, and hence, PE investors are finding it difficult to close deals here.”
Graphics by Ahmed Raza Khan/Mint