Private investment funds are shying away from buying stakes in listed companies, deals that were preferred until two years ago, when private equity (PE) firms were rushing to buy into the Indian growth story.

Private investment in public equity (PIPE) has dropped since then to nearly a quarter of its share in annual PE investments, according to VCCEdge, the financial research unit of VCCircle.

Last year’s market crash, coupled with the emergence of new investment avenues, appears to have caused this change in attitude. “The losses in 2008 may have led funds to take a more conservative approach," says Keshav Misra, head of investments, consumer goods, Baring Private Equity Partners India Ltd.

A new direction: The Lehman Brothers office in New York. Last year’s market crash and the emergence of new investment avenues appear to have caused a change in investor attitude. Jeremy Bales/Bloomberg

In 2009, when PE deals were the lowest since 2005, funds invested only $670 million (Rs3,135.6 crore) in public markets out of a total investment of $3.73 billion across 175 transactions.

This includes many funds that did quick flips by buying into listed companies between September 2008 and March and then offloading them to cash in on the market rally that started in May. If these are excluded, the value of PIPE deals stood at $408 million across 32 deals, or 11% of this calendar year’s deal value, until 18 December.

That’s way below their peak of 41% in 2007 and 16% in 2008, according to VCCEdge. The reason? Many funds that invested in PIPE deals at the end of 2007 and early 2008 suffered heavy losses. For instance, Singapore-based Orient Global exited its Rs850 crore investment in financial services group India Infoline Ltd at a reported loss of at least 50%.

This has scared investors away. Global private equity firm Blackstone Group LP, one of the most active in the PIPE space with three deals in fiscal 2008, has struck three transactions in privately held companies since the meltdown.

The focus now seems to be on qualified institutional placements, says Vishal Gupta, director at Bessemer Venture Partners. The US-headquartered investment firm has closed two deals in privately held companies in the past six months.

Also, there is a class of PE funds looking at buyout transactions that are more suited to privately held companies. Although buyouts are still a small part of the Indian PE landscape, which is dominated by growth-capital deals, there are more funds focused on such transactions.

Funds do not get a lot of negotiating room in public companies and the possibilities of structured deals are also low.

There have been majority stake transactions in public markets but these deals involve complying with open offer norms and dealing with the capital market regulator, says Misra of Baring.

Graphics: Ahmed Raza Khan / Mint

Another factor that could drive PIPE deals in the coming months is listed companies de-freezing their fund-raising plans. “We are seeing more PIPE deals with more promoters willing to dilute their stake for expansion and acquisitions," says Misra.

Since September, there have been eight PIPE deals worth $197 million. The largest one was in November when LP invested $100 million in direct-to-home operator Dish TV India Ltd.

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