Mumbai: Private equity (PE) firms are actively approaching companies that have shelved plans to raise money through share sales due to volatile capital markets.

According to six investment bankers, PE firms are scouting for investment opportunities among such companies and at least half a dozen deals are being currently discussed.

Equity markets have been fluctuating since a record high in November. The benchmark sensitive index, or Sensex, of the Bombay Stock Exchange, which rose to 21,004 points on 5 November, has slumped since then to a low of 17,463 in February. It closed on Wednesday at 19,612.20, down 0.38%.

At least 79 companies that filed their draft red herring prospectus (DRHP) with market regulator Securities and Exchange Board of India (Sebi) since April 2010 till date, have not gone ahead with their initial public offering (IPO) plans, according to data compiled by Capitaline, a financial data provider.

Oil storage company IOT Infrastructure and Energy Services Ltd, a joint venture between Indian Oil Corp. Ltd and Germany’s Oiltanking GmbH, had filed a DRHP in September. It’s currently in talks with PE firms.

While pre-IPO companies are traditionally targets for PE firms, increased competition has sharpened the pursuit, with close to 300 funds in the market today.

“There is more depth today in the PE market with so many foreign funds that have entered in the past two years and with a number of domestic funds cropping up," said Hetal Gandhi, managing director of Tano India Advisors Pvt. Ltd. “We are currently looking at two-three such companies ourselves."

Two of Tano’s portfolio companies, Icomm Tele Ltd and Virgo Engineers Ltd, which have kept aside IPO plans, have evoked interest among other PE firms, Gandhi said.

The capital market volatility could result in deals being available at reduced levels.

“The valuations that they will be able to get in such a market are significantly lower than what they get in pre-IPO placement," said an investment banker at JM Financial Consultants Pvt. Ltd on condition of anonymity as he’s not authorized to speak to the media. “With companies also desperate for money to fund growth plans, they would (readily) accept PE investments."

JM Financial is lead managing IPO efforts at companies such as Reid and Taylor (India) Ltd, Tata AutoComp System Ltd, Tree House Education and Accessories Ltd and Powerica Ltd, which have filed draft prospectuses, but are yet to proceed with fund-raising plans.

Jacob Ballas Capital India Pvt. Ltd picked up a minority stake in PNC Infratech Ltd, an Agra-based engineering and infrastructure company, for 150 crore in January. PNC was looking to raise funds for over a year, but opted for PE funding over an IPO. The company had filed a DRHP to raise 175 crore in late 2009.

Companies with firm expansion plans will need alternative sources of funding and, hence, will opt for PE money, said Srinivas Chidambaram, managing director of Jacob Ballas. “When the IPO market gets weak, the PE market gets stronger," he said.

PE firms concluded 376 deals and deployed $8.3 billion (aroundRs 36,690 crore today) in 2010, up from 331 deals worth $4.7 billion in 2009, when the industry was struggling amid the global slump, according to sector tracker VCCEdge. The combined value of deals in the year 2010 is, however, less than half the peak witnessed in 2007, when PE firms invested $17 billion.

Some companies are also forming informal alliances and getting a commitment from a PE firm to come in as an anchor investor, said another investment banker.

Mobile value-added services company One97 Communications Ltd, which had filed for an IPO, is now in talks with Tano for the PE firm to pick up a stake through the share sale. Similar is the case with AGS Transact Technologies Ltd, a technology-based services company.

Companies preparing to list on exchanges have to comply with Sebi’s regulations by tightening corporate governance and internal systems.

“So PE firms find them attractive as there is already some level of diligence done and, hence, the deal can be done faster," said Shailendra Ghaste, managing director of IDFC-SSKI Pvt. Ltd.

Another advantage is that they could ensure a quick exit option as the companies are already IPO-ready and will hit the primary market in the next 12-18 months.

“These PE?firms want a quick exit route as against an investment horizon of three-five years," said Samir Bahl, executive director of Centrum Capital Ltd. “Unless the markets take an upward flight, companies will continue to look for alternative sources of capital."