Bangalore: It’s a classic tug of war between private equity (PE) investors and their portfolio firms.
With capital markets improving and initial public offerings (IPOs) staging a return, PE firms are expecting some of their portfolio companies to consider share sales as well. These firms, though, say they aren’t ready to go public yet in a still volatile market.
“IPO would not happen this year as external factors are making it very difficult to predict how the IPO will pan out,” says Sanjay Nayak, managing director and chief executive of Tejas Networks Ltd, in which Intel Capital invested in 2002. “We may look at going public next year.”
A mismatch: Raja Kumar of UTI Ventures. Investors accept that they try to use every opportunity to exit. Hemant Mishra / Mint
Arun Tyagi, general manager, corporate marketing, IndiaMART InterMESH Ltd, also backed by Intel Capital, says an IPO is inevitable with investors on board, “(But) the timing of the IPO will be driven by company growth and market conditions in (the) next one year or so.”
The mismatch in IPO plans is not new, say analysts. For many investors, it’s a capital call as their limited partners (LPs) start insisting on liquidation after a period of investment. Limited partners are key backers of PE and venture capital funds.
PE firms typically expect portfolio companies in which they have been invested in for at least three years, to list for an IPO—an ideal exit for such investors with expected returns of three-five times their investments.
PE firms tend to be more coercive in pushing for an IPO, especially if their portfolio company’s promoter is a small player, said an investment banker in Mumbai, requesting anonymity. “They (investors) cannot sue a company saying it’s not going for an IPO. However, the personality factor of a promoter does play a role,” the banker said. “If it’s a weak promoter, they do try to take advantage as we have seen and these companies get nowhere. No one wants value destruction.”
Many PE-backed companies such as Yatra Online Pvt. Ltd and Persistent Systems Ltd, in which Intel Capital has invested, as well as UTI Ventures’ Primus Retail Pvt. Ltd, say they will wait at least a year for some stability to set in.
The Bombay Stock Exchange’s (BSE) 30-stock Sensex, India’s most widely tracked index, has risen 52% so far this year but has seen steep falls as well.
Notwithstanding this, PE firms Mint spoke with say there are a host of portfolio companies that are ripe for IPOs: Intel Capital’s One97 Communications Pvt. Ltd; Powerica Ltd and Endurance Technologies Pvt. Ltd, backed by Standard Chartered Private Equity; UTI Ventures’ SemanticSpace Technologies Ltd; 2i Capital’s Pipavav Shipyard Ltd; and Zephyr Peacock’s WLC India.
“Ripe for an IPO would mean more in terms of a specific size relative to the industry…both on revenues and profits besides the likely market cap,” says Nitin Deshmukh, head, Kotak Private Equity Group (KPEG). Deshmukh said a couple of Kotak PE’s portfolio companies, too, are ripe for IPOs but didn’t share more details.
One other factor is a profitable businesses with at least $30-50 million (Rs145-242.5 crore) in annual revenue, growing at a sustainable, double-digit compound annual growth rate.
For Mukul Gulati, Zephyr Peacock India’s managing director, being ripe for an IPO also means a firm has a proven business model, a well-articulated growth strategy and importantly, a mature management team that can handle the scrutiny of the public markets.
Some PE firms also argue that public markets in India have a low entry barrier and it should not be difficult for companies to list prematurely. That is, where the finance or investor relations teams are not geared up to communicate well with public investors and where the internal auditing and budgeting process are not robust enough to guide the market on earnings visibility.
Akil Hirani, managing partner, Majmudar and Co., a corporate law firm, says the nature and timing of PE exits are usually agreed to in the contracts signed between the promoters and the investors.
“Depending on the agreement, when contractually accepted, investors may push for an exit route,” Hirani said, adding that not many small companies can survive in the IPO market right now. Companies recently listed on bourses are big players and in core verticals such as infrastructure and power, he said.
The investors accept that they do try to make use of every opportunity to exit. “The obligation (of exits) is to be discharged. Some kind of an understanding is always reached between the company and the investors,” said UTI Ventures’ founder Raja Kumar.