The promoters of Manipal Education and Medical Group International India Pvt. Ltd (MEMG), which runs the Manipal University and Manipal Hospitals, have raised debt of about $260 million to buy back the stake held by IDFC Private Equity (IDFC PE) and Capital International Private Equity Funds in the company.

The company has also used internal accruals to buy back the stake and offer the two investors an exit route, Ranjan Pai, managing director and chief executive officer, Manipal Education, said in a telephone interview.

In 2006, Manipal Education received $40 million from Capital International and $30 million from IDFC PE for a 12% stake.

Manipal Education has borrowed the capital from a consortium of banks, which Pai declined to name.

He said it was the holding company (MEMG), controlled by promoters Ramdas Pai and son Ranjan, that raised the capital.

“PremjiInvest and Catamaran continue to stay invested," said Ranjan Pai.

The investors have got “satisfactory returns", Pai said, without giving details.

IDFC PE has invested in the Manipal Group thrice since 2006 and this is their second exit.

Last year, IDFC Alternatives Ltd, through IDFC Private Equity Fund III, had invested 100 crore in Manipal Servicecorp Facility Management Pvt. Ltd, a facility management services firm, promoted by Manipal Education. IDFC is still invested in Manipal Servicecorp.

IDFC PE was seeking an exit from this investment and it was a function of their investment horizon, Satish Mandhana, managing partner and chief investment officer of IDFC Alternatives, said in a telephone interview.

“We typically stay invested for five to seven years," said Mandhana.

“It says a lot about a promoter if they go to the extent of leveraging to give an exit," he said, referring to the buyback by the Pai family to offer exits.

Going public is the preferred route of exit in the private equity investment world since strategic sales are considered difficult for the lack of buyers while buybacks are considered difficult for the lack of enforceability.

Moreover, buybacks or the so-called put options, are considered a last resort.

“A buyback in today’s time is a function of the market. We have seen instances where companies that have been growing at the compound annual growth rate (CAGR) of 30% get low valuations," said Mandhana.

“In education, IPO is still a question mark, partly because of the track record of other listed firms and partly due to the regulations regarding for profit education," he said.

Mandhana said they made returns of more than 2x (times) in this exit.

Private equity firms typically expect 2-3x returns with an internal rate of return (IRR) of more than 16% on their Indian investments.

Another private equity investor said a promoter would raise debt to buy back stake from an investor when they see an underlying value in the buyback as well as strong growth in the company.

“It could be a part of their shareholding agreement or the promoter believes that the buyback is available at an attractive valuation," said Munish Dayal, partner at Baring Private Equity Partners (India) Ltd.

Stake buyback, however, remains a very small percentage of exits in India and contribute to about 5% of the exits in a year, according to consultant KPMG India’s estimates

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