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PE investments take a beating

With a bearish phase prevailing over stock markets, valuations of private equity (PE) investments have taken a beating.

Certain PEs which had overestimated companies to enter at high values have seen a decline in valuations due to volatile capital market conditions. A compilation of how PE investments of 2007 compare with current mark-to-market (MTM) values shows that about 58% of the PIPE (private investments in public enterprises) deals of 2007 are in the negative territory.

According to the research undertaken by SMC Investment Solutions & Services (May 2008), the only ray of hope is that overall till-date-returns on PIPE deals of 2007 (on volume basis) are still in the positive, although at a margal 8.3%, despite rough market conditions of 2008.

However, wealth creation is highly imbalanced in different sectors, with Banking, Financial Services & Insurance (BFSI), telecom and retail sectors ducking the volatile capital market conditions. On the other hand, sectors like IT & ITeS, infrastructure, healthcare and life sciences, media, manufacturing and real estate are in the negative zone.

Though the largest deal in telecom (Airtel) witnessed a 53% surge in current MTM valuation, the largest deal in infrastructure (GMR) witnessed a steep fall of 44% in MTM value.

Temasek Holdings had invested $1,296 million in Airtel at a price of Rs 565 per share last year. With the appreciation in price to Rs 863, the MTM value has increased to $1,906 million. However, the bunch of investors who had pumped in $960 mn in GMR were not so lucky.

Investors, including Kotak, T Rowe Price, UBS, Citi and Deutsche Bank, had made the investment at a price of Rs 240 per share, which has declined to Rs 134 per share, leading to decline in valuation.

Said Shujaat Khan, MD, Blue River Capital: “While the long-term prospects for most industries in India remain favourable, we had seen valuations for power, real estate, and financial services sectors increase to unsustainable levels. Those have corrected the most in the public markets.”

Said Sidharth Punshi, MD, Jefferies India, the local arm of US-based investment bank: “When PEs invest in companies they believe in, they invest in fundamentals and take a long-term view of 3-5 years. So short-term market fluctuations do not impact them.”

Nevertheless, the notional loss is being felt across sectors. For instance, there are PEs who invested at a lower entry price in the same company in which others invested at a higher price.

Take the example of ICSA. Morgan Stanley, Merrill Lynch and UBS invested $27 million in the technology solutions company at Rs 317 per share. The price has appreciated to Rs 404, a notional benefit to investors.

However, Goldman Sachs had entered at an even lower price of Rs 227 per share, which gives the PE some more reason to cheer.

So, the learnings are many on the PE investment front. Going forward, said Khan of Blue River Capital, one will see much wider variance in performance within each industry which will reflect differences in quality of management, capital efficiency, and competitiveness of each business. “Taking a view on each company will be more important than the overall view on the sector,” said Khan.

Source: Times of India

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