Mumbai: Founder-chairman V.G. Siddhartha of Amalgamated Bean Coffee Trading Co. Ltd (ABCTL) has bought back the entire stake that venture capital investor Sequoia Capital acquired in the company that runs the Café Coffee Day (CCD) chain of coffee shops, said two persons close to the development. It’s the latest in a series of stake buy-backs by company promoters.
Sequoia had invested $20 million (Rs 110 crore today) in 2006 for an undisclosed stake in ABCTL, which runs 1,300 cafes that it plans to expand to 2,000 by the end of 2014.
“Yes, we can confirm the exit from Café Coffee Day," said G.V. Ravishankar, managing director of Sequoia Capital. “The successful outcome was a result of the entrepreneur’s superior vision for the business, supported by the management team’s excellent execution."
Siddhartha did not respond to an email sent by Mint on the development on Wednesday.
“Sequoia has exited with returns of more than 2x (two times its investment) and an internal rate of return (IRR) of 18-20%," said one of the two persons cited above, on condition of anonymity.
In June, the Business Standard newspaper reported that Sequoia was looking at exiting from ABCTL.
Templeton Darby International, the International Finance Corporation and the Deutsche Group also hold stakes in ABCTL, according to media reports. “The promoter is looking at buying back stakes from all investors," said the second person cited above. He, too, spoke on condition of anonymity.
Company promoters in India are looking at buying back stakes in their firms to offer investors an exit opportunity in the face of a tepid market for initial public offerings, slowing PE investment and an economic downturn.
Most PE deals have a pre-agreed buy-back clause. While exercising a buy-back option, a promoter repurchases an investor’s stake at a predetermined price, offering an assured exit.
In June, VCCircle, an online tracker of investment activity, reported that Analjit Singh-led Max India Ltd plans to buy back the stake held by Axis Bank Ltd in Max New York Life Insurance Co. Ltd, which is being renamed Max Life Insurance.
HDFC Property Ventures Ltd exited L&T Urban Infrastructure Ltd by selling its 10.1% stake to the promoter, L&T Infrastructure Development Projects Ltd, for ₹ 122 crore.
V. G. Siddhartha, founder and owner of Cafe Coffee Day, has brought back the stake from Sequoia capital, which invested $20 million in the company in 2006
The promoters of Ind-Barath Power Gencom Ltd bought back the shares held by PTC India Financial Services Ltd (PFS) in October 2011. PFS had bought a 26% stake in the company for ₹ 55.63 crore in August 2008.
In a similar situation, the promoter of Bangalore-based boutique investment bank Viedea Capital Advisors Pvt. Ltd had a few months ago bought back the stake of six (out of nine) of its investors.
There are multiple reasons for the buy-backs, said Deepak Srinath, founder-director of Viedea Capital. “It gives the promoter more control. Also, it’s fair that a promoter gives the investors an exit or at least an opportunity. These investors have an investment horizon of four-six years. It is an issue of ethics," he said.
Experts say while returns of over 2x are healthy for a five-six years’ investment, a buy-back by promoters raises question about the reason for the exit.
PE firms have been struggling to deliver the returns promised to their limited partners, or investors in venture capital and PE funds. A large portion of the funds invested in the country between 2003 and 2007 is still being held in PE portfolios. According to a Bain research report on 15 May, 71% of the capital deployed in the largest deals in India during those years is yet to be returned to limited partners.
Furthermore, for deals done in 2006-07, investment horizons are reaching their end, prompting investors to look for ways to exit.
Returns of under 3x, especially in the current context where the rupee has depreciated significantly against the dollar, are questionable for a five-six-year-old investment by a dollar PE fund, according to Siddharth Bafna, partner and head of the corporate finance and transaction services practice at Lodha and Co.
“When it comes to a buy-back of stake, one has to know the reason behind it. For a typical PE investor, it’s a safety measure where there is a pre-agreed return on investment in case other exit options are not easily available," he said.
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