PE firms opt for strategic sales in volatile markets

PE firms opt for strategic sales in volatile markets

Mumbai: Volatile capital markets have made it difficult for private equity (PE) investors to exit investments through a sale of shares to the public, but many of them are planning exits through strategic sales. Some are actively exploring this route as they need to give returns to their investors before raising another fund. Others need to do this because the tenure of their funds is coming to an end.

Since January, there have been 24 such exits, double the number of exits through initial public offers or IPOs. Besides, there have been 10 sales to other PE investors and 14 instances of buying back of shares by promoters of firms, according to data from VCCEdge, which tracks venture and private equity fund activity. In a strategic sale, a PE firm sells its stake to another firm operating in the same space as the portfolio company.

The trend will get stronger as there is a change in the mindset of promoters who are willing to exit whenever they get a good value, according to Bhavesh Shah, executive director of investment banking at JM Financial Consultants.

“Deals such as the sale of Ranbaxy Laboratories, Piramal’s healthcare business and Paras Pharmaceuticals are indicative of this trend," said Shah.

JM Financial is currently working on two such exits but Shah declined to share details.

“Many funds which invested in the peak of 2006-2007 want to exit now. Given the state of the market, listing may not give them the fair value and hence they are exploring this route," said Hetal Gandhi, managing director, Tano India Advisors Pvt. Ltd, a PE firm.

Tano is currently working on a couple of exits through this route.

Investment bankers attribute this trend to the strong interest of foreign firms in acquiring stake in local companies. “In such a volatile capital market, we actively focus on exits through sale to strategic investors," said Deepesh Garg, director, o3 Capital Advisors Pvt. Ltd. o3 is currently working on five to six such exits.

According to global deal tracking firm Dealogic, India’s inbound merger and acquisitions or M&A volume has surged to $23.4 billion (Rs 1.1 trillion) in first six months of the year till June, slightly behind the record volume in the first six months of 2007.

Though year-on-year there has been an increase in inbound M&A volume, on a quarter-on-quarter basis, there has been a significant decline. Some of the sectors in which strategic sales are happening include engineering, information technology, healthcare and lifesciences, consumer and retail, and food and agriculture.

“There is a lot more interest in the agri-business today than ever before," said Rajesh Shrivastava, chairman and managing director, Rabo Equity Advisors, which manages an agri-focused fund.

In August, Rabo exited its investment in GeePee Agri by selling it to ADM Agro Industries India Pvt. Ltd. Shrivastava declined to disclose the details of the deal.

Rabo will be looking at a couple of exits by early next year, he added.

Exits through strategic sales often give better returns to PE investors than IPOs, say experts.

Typically, PE firms look to make a return of 25% on their investments. However, against the backdrop of high inflation, rising interest rates, volatile stock markets and governance issues that have rocked many Indian firms, the expectation of limited partners or LPs who invest in PE funds has come down.

Since January, India’s bellwether equity index Sensex has fallen 16.63%. It is currently trading 17.1 times estimated earnings for the year ending 31 March 2012, down from 19.3 times in December.

Recent examples of strategic sales include WestBridge Capital selling its stake in software testing company AppLabs Technologies Pvt. Ltd to US information technology firm Computer Sciences Corp; Blackstone Advisors India Pvt. Ltd selling stake in business process outsourcing company Intelenet Global Services Pvt. Ltd to UK-based international services firm Serco Group Plc; and Lightspeed Venture Partners and Sequoia Capital India Advisors Pvt. Ltd exiting education firm TutorVista Global Pvt. Ltd by selling their stakes to media and education company Pearson Plc.

Deals India, published jointly by Mint, Dow Jones Newswires and The Wall Street Journal, is a one-stop destination for investment professionals following deal flow, deals news, private equity and venture-capital activity in India.

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