Mumbai: Private equity (PE) exits through secondary market sales have picked up significantly this year, as PE managers rush to make good their investments. The number of exits has increased sevenfold since last year.
Graphics: Ahmed Raza Khan / Mint
For the period January-October 2008, only four PE exits worth $164 million (Rs756 crore today) took place compared with 28 exits worth $499 million between January and October this year, according to data from Venture Intelligence, a research firm focused on venture capital (VC) and PE activity.
“There is a better opportunity for exit right now than it was a year back, and the funds are just taking advantage of the situation whenever they can to show some returns to their investors,” said Keshav Misra, head of investments, consumer and fast-moving consumer goods, Baring Private Equity Partners India Ltd.
While the primary reason for this could be the increased buoyancy in the stock market—India’s bellwether equity index, the Bombay Stock Exchange’s Sensex, has more than doubled since March—there are several other underlying factors that have led to the rush for exits.
Graphics: Ahmed Raza Khan / Mint
First, there is pressure on PE firms to show that they are actually making profits. “There has been so much of investing happening that there has not been much of exits,” said Vikram Utamsingh, executive director and head of PE at KPMG India Pvt. Ltd. “So we have 300 PE transactions a year for four-five years and only 30-40 exits, so clearly the funds are under pressure to show that they can exit with good returns.”
Second, the investors in PE funds, otherwise referred to as limited partners (LPs), are also beginning to identify those PE managers or general partners (GPs) who have ensured good returns on exit, and are aligning with them as against those GPs who have made investments, but have refrained from exits.
“The pressure to exit is not so much that the LPs are demanding you to exit, but more for you to be able to show that you are a credible GP in the Indian PE marketplace,” said Utamsingh. Thus, a good exit record comes in handy when GPs hit the road again for fund-raising.
“You are going to earn extra brownie points with the LPs if you give them returns during the downtime. They will value it more now,” said Ashish Dhawan of ChrysCapital Investment Advisors, which completely exited Shriram Transport Finance Co. Ltd early this month.
“We invested in Shriram Transport five years ago and have achieved good returns mostly through earnings growth rather than the forward multiple,” he added.
ChrysCapital invested around Rs100 crore in Shriram Transport Finance in 2005 and made 12 times its investment—or a 12x return, as it is called in the VC industry—when it exited in two phases, in May and November.
A third reason is that many investments made around five years back or even earlier have now matured. Between 1999 and 2003, not a lot was happening in the PE market in India. It was only in late 2003 and 2004 that growth equity deals happened. “So deals done in 2004-05 are now maturing and, hence, people are exiting—whether they are good or bad,” said Dhawan.
This month, US-based VC firm Walden International sold 4% of its stake in Bangalore-based information technology services firm MindTree Ltd for Rs75 crore. Walden had invested in the company nearly 10 years ago.
In September, Temasek Holdings Pte Ltd sold its 13.5% stake in multiplex chain Fame India Ltd for around Rs14 crore. Temasek had invested in the company in July 2005.
Clearwater Capital Partners Llc sold 2.37% of its stake in September in Diamond Cables Ltd for $2.5 million. Clearwater had invested in the company in November 2007.
In July, there were three big exits. Orient Global Tamarind Fund Pte. Ltd sold 7.13% of its stake in India Infoline Ltd for $50 million, Warburg Pincus Llc sold 5.38% of its stake in Max India Ltd for $49 million and Baring India sold 2.1% of its stake in MphasiS Ltd for $40 million.
Finally, the situation in the US and the European markets has also played a role in the increased number of exits.
In March, PE fund 3i India Pvt. Ltd, the Indian arm of UK-based 3i Group Plc, sold 80% of its stake in Mundra Port and Special Economic Zone Ltd (MPSEZ) in the open market. 3i had invested $50 million in MPSEZ in 2007 and its proceeds from the stake sale as of March totalled $33 million.
This move came after 3i Group said it was accelerating its programme to sell assets to meet a mid-2010 target of halving its debt in an effort to reduce its leverage. The Wall Street Journal, in March, reported CEO Michael Queen as saying that 3i was “turning up the heat” on the sale of some of its portfolios and some VC investments.
“3i may have had some pressure because they are facing some challenges, not from LPs, but due to their global restructuring plan,” said an investment banker who did not want to be identified.
According to ChrysCapital’s Dhawan, LPs do not have any expectations of good returns from the deals done in the US and Europe in 2007 and 2008, so if the Indian deals are giving them good returns, they would certainly welcome them.