The Indian private equity (PE) industry’s fondness for private investment in public equity (PIPE) deals remains unaffected by soaring share prices. If anything, it has only grown stronger. Till September this year, PE firms announced 16 such deals worth an estimated $1.71 billion (Rs6,720 crore), against $1.25 billion across 36 deals for all of 2006.
Overall, PIPE deals accounted for 21.5% of the estimated $7.92 billion worth of PE transactions announced between January and September. This, however, does not include deals announced by non-PE investors such as hedge funds and other financial institutions and the actual share of PIPEs could be much higher.
Unconfirmed estimates put PIPEs at 40-60% of all deals announced this year. “The proportion of such investments in India is significantly higher compared to international levels,” says Biswajit Subramanian, managing director, Providence Equity Partners Llc. The firm opened shop in New Delhi in January and says it is agreeable to PIPEs under the right circumstances.
There are some, however, who regard PIPEs as a strategy that goes against the basic objectives of PE investing. “The question is, as a PE investor, what kind of (shareholder) rights do you get when you take a minority interest in a public company?” asks Anil Ahuja, managing director and co-head, Asia, at 3i Group Plc.
The London-headquartered firm started investing in India in 2005 and has a strong focus on unlisted growth investments. “By nature, PE’s role is to impose financial discipline, improve corporate governance and ensure better shareholder returns. In a listed transaction, you cannot set down any of those conditions,” says Rahul Bhasin, managing partner, Baring Private Equity Partners (India) Ltd. That said, it is unlikely that the incidence of PIPE deals will decline in the medium term, even as listed companies get dearer in the ongoing market rally. There are a few reasons.
First, as stock prices soar, so do potential earnings for PE investors. Among the top 10 exits in 2007, five were from listed companies (which may not have been listed at the time of investment). In May, Sequoia Capital India sold 4.45%, almost half of its 9.45% stake in Firstsource Solutions Ltd for $42 million—Sequoia had acquired the stake via a stock swap when Firstsource bought Sequoia-funded company FirstRing Services. And a month earlier, ICICI Venture Funds Management Co. sold 3.25% stake in Deccan Aviation Ltd (a total of 14%) for $7 million and is estimated to have earned a 45% profit on its original investment two years ago.
Second, because of the low hurdles to going public in India, the number of listed companies available is quite high. However, most of these are also very young and require hand-holding similar to an unlisted company. Kotak Private Equity Group head Nitin Deshmukh says: “Unlisted deals are getting expensive too. Investors are probably taking a call for better liquidity.” Investors see PIPEs as workable, as long as the approach remains PE.