Speciality Restaurants IPO gives a breather to PE investors

Mumbai: The success of the Speciality Restaurants Ltd public offering could offer a glimmer of hope to private equity (PE) investors who are struggling to exit the companies they have invested in over the past few years.

Though SAIF Partners and Glix Securities Pvt. Ltd are not selling their shares in the restaurant chain, the former could potentially earn an internal rate of return, or IRR, of 18.16% on its investment while Glix could earn 31.17%, going by the issue price of the restaurant chain. These returns are in line with what PE investors expect.

IRR is a measure of the profitability of an investment.

The company had issued convertible preference shares to both PE investors. All the preference shares of the company were converted into fully paid-up equity shares of the company in February 2011 and November 2011.

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Mint’s Deepti Chaudhary says the success of the Speciality Restaurants IPO is a breather for private equity firms struggling to find opportunities to exit.

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SAIF had invested ₹ 35.5 crore in the company in December 2007, followed by an investment of ₹ 15 crore by Glix Securities in May 2010. The cost per share, after the conversion of preference shares, is ₹ 71 for SAIF and ₹ 81 for Glix, according to a research note by Lodha Capital Markets Ltd, based on information provided by Speciality Restaurants in its prospectus.

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 are still being held in PE portfolios. According to a Bain research report on 15 May, 71% of the capital deployed on the largest deals in India during those years is yet to be returned to limited partners.

“The (Speciality Restaurants) initial public offering (IPO) is a breather but not a huge breakthrough as the offer size was small and retail participation was low,” said Nimesh Salot, director, investment banking, Ladderup Corporate Advisory Pvt. Ltd, an investment bank.

The second restaurant chain to go public in India after Jubilant FoodWorks Ltd in 2010, fine dining operator Speciality Restaurants recently concluded its IPO at ₹ 150 per share, raising over ₹ 175 crore. The IPO was oversubscribed 2.54 times on the last day of its issue on 18 May, according to the stock exchange data. While Glix could not be contacted, an official from SAIF refused to comment saying they were “in a silent period due to the IPO”.

The promoters of HT Media Ltd, which publishes Hindustan Times and Mint, and Jubilant are closely related. There are no promoter crossholdings.

The Anjan Chatterjee-promoted Speciality Restaurants has 82 outlets across 11 brands, including Mainland China, Oh! Calcutta, Sweet Bengal, Flame and Grill, Sigree and Machaan. The proceeds of the IPO will be mainly used for new restaurants, the repayment of term loans and general corporate purposes.

Experts said that while the IPO of Speciality Restaurants is a breather for PE funds, exits will remain a challenge for them this year as well. 2011 saw a sharp 30% drop in the number of exits over 2010. Besides depressed stock markets, another reason for the exit market in India being lacklustre is that many of the deals struck between 2006 and 2008 were at premium valuations that make exits at attractive IRRs difficult to achieve.

These are challenging times for exits, as valuations are depressed compared with what they were in the boom years, said Siddharth Bafna, partner and head of the corporate finance and transaction services practice at Lodha and Co.

“The IPO market is not steady and the rupee depreciation certainly does not help the cause of PE investors who invested from dollar funds,” said Bafna. According to him, exits will be challenging, though they are due in many deals struck in 2006-2008.

Nor will mergers and acquisitions (M&A) be an attractive exit options, thanks to the slowdown of foreign inflows into India.

“Exits will mainly be driven through either strategic or secondary sales. Up until now, strategic sales through the inbound route have not seen much of an impact. I suspect, however, that Europe will catch up on some of these deals,” said Vivek Gupta, partner, M&A practice, BMR Advisors.

deepti.c@livemint.com