Mumbai: During the height of the bull run, one-fifth of private equity (PE) investments in India were in listed companies. But the financial crisis saw the value of these investments crash. Now, exits from such funds will be determined by the PE firms’ staying power, says Munish Dayal, partner at Barings Private Equity Partners India Ltd. Edited excerpts:
The value of PIPE (private investments in public enterprises) investments in 2007 were eroded during the financial crisis. Have they recovered? Do we see a lot of exits happening in the near future?
In 2007, approximately $3 billion (around Rs13,650 crore) or 21% of all private equity investments were of PIPE nature. Given that markets continue to be depressed below the highs seen in 2007, it is unlikely that PIPE investments in general would have recovered their cost. Despite the recovery in the markets, sentiment continues to be cautious with a global recovery still further away. Recognizing that markets are not in a secular uptrend and there is weakness in the market, private equity funds would evaluate selling their PIPE positions primarily driven by their holding power. Funds whose life is coming to an end, which could be the case for five-year funds raised in 2006, would be seriously exploring exits from their PIPE portfolio.
Graphic: Ahmed Raza Khan / Mint
Would private equity firms look to do more PIPE deals now? Has risk appetite returned?
With the benefit of hindsight, the best time possible to do PIPE deals was in March last year when the markets started recovering from the lows and most share prices have doubled from those levels. However, it is never possible to time the market perfectly and that is not a competence that private equity funds bring to the table. Globally, the best PE funds are able to consistently deliver high returns through superior risk management, which is manifested by playing a proactive role in their portfolio companies helping them in the growth process. Our own approach is also in line with these best practices.
We recommend exploring PIPE opportunities in industries where a disproportionate share of value creation will be captured by companies which are already listed and valuations are compelling.
Would limited partners (LPs) be amenable to PIPE deals now?
LPs typically expect the fund to stay consistent with its investment strategy with some leeway to explore investments opportunistically. As long as PIPE is a well-articulated component of the fund strategy, they will be supportive.
Are PIPE deals being structured differently?
PIPE deals have historically been passive investments where the structure by design does not offer much in terms of downside protection or other avenues for managing risk. Any such structure has to be in the purview of the existing regulatory ecosystem and there haven’t been any significant changes in that.
With the Securities and Exchange Board of India mulling a change in takeover norms (increasing the open offer trigger from 15% to 35%), what impact would there be on the PE industry?
We see this as enabling more active participation from the PE industry in mid-cap stocks, where many times the constraint of not triggering the open offer as well as having a minimum size of investment excludes several attractive opportunities.
Which sectors look most attractive from your point of view to do such deals?
The fast-moving consumer goods sector and the banking sector in India definitely qualify for exploring such investments.