The market rout due to the pandemic has deeply eroded the value of investments made by private equity (PE) funds in listed companies, undermining the confidence of investors in the funds and potentially delaying their exits.
Global PE giants such as Blackstone, Bain Capital and Advent International as well as homegrown ones such as Multiples Alternate Asset Management have seen some of their bets in listed companies lose as much as half of their value. A similar situation is brewing in unlisted companies too, where buyout funds have bet billions of dollars.
The crisis in the PE industry follows an almost decade-long boom in mergers and acquisitions, with buyout firms placing ever bigger bets on Indian companies.
The sharp drop in the value of investments is bound to hurt overall returns for PE funds. It will also delay exit timelines as they may not sell their stakes at depressed prices. In the immediate aftermath of the stocks rout, some PE firms received margin calls on loans availed by them against their portfolio of shares, forcing them to seek restructuring of the loans, or sell shares to pay off the loans.
“There will definitely be a huge impact on PE returns as the portfolio value of almost all the PE funds in India is likely to get slashed by at least 15-20%, which implies that annual returns that they would have otherwise made in 2020 would now get completely washed out," said Gopal Agrawal, co-head, investment banking, Edelweiss.
Indian stocks fell nearly 23% in March as the outbreak triggered panic selling. While the benchmark Sensex has rebounded nearly 7% in April from its March-lows, some of the large PE transactions in listed companies over the last three years continue to trade far below their investment value. According to Mint’s calculations, some of the worst affected include global PE firm Advent International’s September 2019 investment in financial services firm Aditya Birla Capital Ltd, whose value has shrunk by more than half to ₹534 crore as on 20 April. Similarly, American asset manager Blackstone’s investment in Kishore Biyani-led Future Lifestyle Fashions Ltd in November last year has fallen over 70% to ₹150 crore from its initial investment value, while Bain Capital’s 2017 bet in Axis Bank Ltd has declined over 15% in value to nearly ₹5,776 crore.
“In our view, we will see a lot more PIPE (private investment in public equity) transactions by volume, if not by value, in 2020 as compared to last year. While some PE firms that invested in PIPE deals as a part of their strategy will continue to remain active, we now expect even those funds that did not earlier invest in PIPE deals to now look at this opportunistically as these assets are now available at significantly cheaper valuations," said Vivek Soni, partner and national leader, private equity services at EY.