Private equity firms turn off PIPE fund flow

Private equity firms turn off PIPE fund flow
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First Published: Wed, Sep 10 2008. 12 54 AM IST
Updated: Wed, Sep 10 2008. 12 54 AM IST
Mumbai: The global market meltdown in the wake of a credit crunch in the US and its subsequent impact on Indian markets have crimped investments here by private equity, or PE, firms in a preferred vehicle even as they have seen a reduction in the total money flowing in from these firms.
Such investments, called private investment in public equity (or PIPE), refer to money put by private equity firms into companies listed on the stock exchanges, and they became popular with such firms in India in 2005, 2006 and 2007, when the stock market soared.
The roiling in the markets seems to have changed that.
Up to the end of August, private equity firms had invested $8.2 billion through 280 deals, with 18% of this amount being accounted for by PIPE transactions, according to Venture Intelligence, a research firm. In all of 2007, private equity firms struck 435 deals to invest $14.3 billion, with 30.7% of the amount being accounted for by PIPE transactions.
The real numbers would have been higher last year, said an executive in a private equity firm.
“This 30.7% may not capture all the deals done last year, especially those by hedge funds that invested in the garb of private equity. On a most conservative basis, PIPEs constituted 50% of all deals done in 2007, and this has slowed considerably in 2008,” said Nitin Deshmukh, head of Kotak Private Equity.
There’s a reason for private equity firms to be conservative with PIPE deals. Almost three-fourths of such transactions they completed in 2007 have resulted in losses, at least in mark-to-market terms (or in terms of the present value of their investments).
According to NEXGEN Capitals Ltd, the investment banking arm of Delhi brokerage SMC Global Securities Ltd, 46 of the 63 PIPE transactions or 73% of the total in 2007, are “in losses”. “Due to the continuous downfall and rough market conditions of 2008, the overall till-date-return on PIPE investments of 2007 is –10.23%, aggregating to a loss of $541.65 million on an absolute basis,” said Jagannadham Thunuguntla, head of equity at NEXGEN, in a report titled Private Equity Investments of 2007, Current Mark-to-Market Values: Up or Down, last updated on 5 September.
“With most of the deals under water, it will be embarrassing for private equity investors to explain themselves to limited partners,” said the head of a private equity firm who did not wish to be named.
Limited partners are investors who put money into private equity funds, and to whom the fund managers are answerable. “Under water” is a term that means an original investment is now trading at a lower value.
Sensex, the benchmark index of the Bombay Stock Exchange, is down by at least 25% since the beginning of the year and several stocks are trading 30-40% below their January 2008 highs.
The Blackstone Group, one of the largest global private equity investors with global assets under management of $119.4 billion, has so far made six investments in India, including three in listed firms. According to data provided by NEXGEN, Blackstone’s investment in Hyderabad-based Nagarjuna Construction Co. Ltd is down at least 40% in value. Its investment in Bangalore-based textile exports firm Gokaldas Exports is down 39%. And its investment in Mumbai-based logistics firm Allcargo Global Logistics is down 14.4%. Blackstone did not respond to an emailed query.
“Investors are on their gu-ard, and they are paying more attention to the mark-to-market risks associated with putting money in listed companies,” said V. Jayasankar, executive director and head of financial sponsors group at Kotak Investment Banking.
“A number of listed companies raise money because they get a certain valuation in a bull run. In that sense, it is opportunistic. When they don’t get that valuation, they may not want to raise that capital,” added P. Harshavardhan, partner and director at The Boston Consulting Group.
And PE firms would themselves be more careful while picking targets, he added.
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First Published: Wed, Sep 10 2008. 12 54 AM IST