Bangalore: Exits by venture capital (VC) firms slumped to their worst since 2007 in the first half of this year as mismatched valuations soured deals, and an overall liquidity crunch took a toll on the buying and public issue plans of Indian companies.
Between January-June, only four firms saw exits by their VC investors, compared with five exits in the first half of last year and 14 in the same period in 2007. Sandeep Bhatnagar / Mint
Between January and June, only four firms saw exits by their VC investors, compared with five exits in the first half of last year and 14 in the same period in 2007, according to a study by Venture Intelligence, a research firm focused on private equity and merger and acquisition (M&A) deals in India.
VC firms typically liquidate their stakes in the companies they have invested in after a stipulated period, depending on the stage of their investments. Fewer exits than usual signal that VCs are holding on to their investments till valuations, M&A activity and initial public offerings (IPOs) improve.
“I think it has been a difficult market for exits. The period between October 2008 and June 2009 has been difficult. What we had were decreased valuations,” said Vikram Utamsingh, executive director and head of private equity advisory at KPMG India Pvt. Ltd, a consultancy firm.
“These exits have to be seen in the context of older investments, some made as long back as 2001 or before,” said Arun Natarajan, founder and chief executive of Venture Intelligence, adding that as most VCs have a horizon of five-seven years, they tend to look for exit option in that time frame.
For example, in an early stage investment, the exit horizon is expected to be between five years and seven years with returns at 7-10 times their investment. In a growth stage deal, the exit horizon is three-five years, with returns in the range of five-seven times.
Much on the lines of previous years, M&As continued to be the most common route of exit this year as well. Though IPOs are another preferred mode of exit for VC investors, public issues have dried up, with only a handful of IPOs so far this year, including Adani Power Ltd’s public issue that opened on 28 June.
Among the M&A exits this year, Norwest Venture Partners and Nexus India Capital’s portfolio company Mobile2Win, a mobile value-added services (VAS) firm, was acquired by Chandigarh-based Altruist group in an all-stock deal.
The deal was seen by many in the industry as the beginning of consolidation in the mobile VAS space. Altruist is now targeting a 20% share of the mobile VAS market in India and is pitched against rivals such as OnMobile Global Ltd and One97 Communications Pvt. Ltd.
The first six months of this year also saw other non-typical exits such as write-offs and at lower valuations.
WestBridge Capital Partners, which merged with venture capital firm Sequoia Capital in 2006, has sold its 3.26% stake in Firstsource Solutions Ltd, a listed business process outsourcing firm. The investor still holds 1.3% stake in Firstsource Solutions.
Sequoia also exited from Royal Orchid Hotels in May, selling its 5.96% stake in the listed company. The firm had invested Rs25 crore in a pre-IPO deal in the hotel chain in 2005 and in May liquidated the stake for Rs9.48 crore, VC Circle reported. Sequoia said in an email to Mint that it would not comment on the issue.
It is now looking at exiting from its portfolio company Comviva Technologies Ltd, earlier known as Bharti Telesoft Ltd. “They are looking at exiting the firm. Comviva may look at an IPO in a year or two,” said a person close to Comviva, requesting anonymity.
In another first-of-its-kind development in the VC business in India, two investors wrote off their investments this year. Canaan Partners, which had put in an undisclosed sum in San Francisco- and New Delhi-based techTribe Networks Inc., wrote off that investment after the business model failed.
Rediff.com India Ltd, too, wrote off its $125,000 (Rs60.6 lakh now) investment made last year in Vakow Technologies Pvt. Ltd, a short messaging service community, after its founders parted ways.
Experts say hurried exits in a downturn typically happen when investors are not able to extend their fund’s life by a year or two, or if they don’t see significant growth potential in a portfolio firm’s business model.
VCs invest out of a fund that’s backed by limited partners, or LPs, who are high net-worth individuals and institutions. The typical lifespan of a fund is five years, after which the investors are expected to give back returns to their limited partners. “A few funds have been pressurized by their LPs to liquidate. In such a case, an investor will pull out,” said KPMG’s Utamsingh. “A few investors also exit when their portfolio becomes too big to handle for them.”
Meanwhile, exit opportunities are expected to go up in the next few months, with M&A activities, particularly acquisitions of Indian firms by foreign companies, anticipated to pick up.
Corporate law firm Majmudar and Co. says it has already started seeing an increase of at least 20% in terms of inquires. “M&A volumes should go up in the next six months,” said Akil Hirani, managing partner at the firm.