Mumbai: Indraprastha Gas Ltd, which supplies fuel in Delhi and its neighbourhood, has bought a 50% stake in Kanpur-based Central UP Gas Ltd (CUGL), a venture of GAIL (India) Ltd and Bharat Petroleum Corp. Ltd (BPCL), for about 70 crore.

With this transaction, IGL will get access to the Kanpur and Bareilly markets of Uttar Pradesh. The transaction offers exits to CUGL’s three investors—IDFC Private Equity, IL&FS Investment Managers Ltd and the Asian Development Bank (ADB)—at about a 17% rate of return, multiplying their investment 2.6 times.

In 2006, these three firms had invested 30 crore in CUGL. IDFC Private Equity and IL&FS Investment Managers each held a 15% stake, while ADB had a 20% stake.

“It was an early stage investment for us. We have been invested for over six years now. We invested in it from our first fund, which is fully exited with this transaction now," said S.G. Shyam Sundar, partner at IDFC Private Equity. “CUGL is a logical fit for Indraprastha Gas, which dominates in the National Capital Region. CUGL opens a new market for them."

GAIL and BPCL are promoters of Indraprastha Gas and IDFC Private Equity and IL&FS Investment Managers were investors in it.

Sundar said IDFC Private Equity continued to be bullish on gas distribution firms due to natural market demand and scalability. IDFC PE is an investor in Maharashtra Natural Gas Ltd, which is also promoted by GAIL and BPCL.

“A fifty percent stake in CUGL will be held by IGL, while BPCL and GAIL will hold 25% stake each now," said an official at GAIL, confirming the transaction. He, however, requested anonymity, as he is not authorized to speak to the media. “CUGL is highly profitable and has strong networks in Bareilly and Kanpur. It makes sense to put money in this company."

Exits are the single most important issue confronting PE investors that have seen one full investment cycle of eight to 10 years in India. Archana Hingorani, chief executive officer and executive director, IL&FS Investment Managers, said while there have been “headwinds" from a macroeconomic perspective, in aggregate, the operating performance of its portfolio remains strong.

“We do intend to monetize this performance and have planned a series of exits in this fiscal. With public markets subdued, many of these exits would be strategic in nature," she said.

There was a significant increase in the number of exits in 2012 compared with 2011―115 exits last year versus 88 the preceding year. This accounted for a total value of $6.8 billion, up from $4.1 billion in 2011.

Experts said exits by PE investors will further add to M&A activity. Sunil Goyal, managing director and chief executive, Ladderup Corporate Advisory Pvt. Ltd, a Mumbai-based investment bank, sees a sharp increase in the number of PE firms looking for a strategic investor for portfolio companies in their search for an exit route.

“In the last two months, eight out of 10 mandates have been for getting a strategic investor. If the valuation is right, getting a buyer is not a problem," he said. According to him, there is a strong M&A appetite among Indian companies besides global firms looking at getting a foothold in the country.