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Warburg Pincus, Citigroup Venture to exit Indian cos to cash in on mkt rally

Private equity fund Warburg Pincus and Citigroup’s private equity arm Citigroup Venture Capital International (CVCI) are among investors rushing to exit as they plan to sell stakes in Indian companies such as real estate developer Emaar MGF in initial public offerings, exploiting the record stocks rally this year.

Morgan Stanley fund and foreign venture fund Monet will sell a part of their stake in the TV channel distributor Hathway Cable and Trinity Capital will exit IL&FS Transportation Network, filings with the regulator show.

“Five years is an average investment holding period for PE investors,’’ says Rajeev Gupta, managing director, Carlyle India Advisors, which owns stake in the nation’s biggest mortgage company Housing Development Finance Corp.

“If a fund believes that there are no triggers for enhanced returns, it will exit even before five years.” Many private equity funds saw their investments diminish last year as companies struggled due to the credit crisis, including the nation’s largest ICICI Venture Funds Management, which saw investments in companies such as retailer Subhiksha resulting in losses.

The revival in stock markets, which has seen the benchmark index double from lows this year, is triggering investors to sell and make profits from their investments.

Twenty public issues have already been okayed by the Securities and Exchange Board of India, and another 30-odd applications are in the pipeline. At least a dozen-odd companies, many of them from the real estate sector, are said to have filed for IPOs, under pressure from their private equity investors who want to earn profits.

Emaar MGF, which pulled out an IPO last year due to poor investor response; Lodha Developers, which created a ripple in Mumbai a few months ago by launching affordable housing schemes and BPTP, which paid record price for a land deal in Noida, are among real estate developers that have filed for a share sale. CVCI will be selling its entire 1.28 % in Emaar MGF’s IPO.

Part of the reason for the exits may also be inexperience of fund managers in selling down their holdings to realise profits for their investors. “Many PE managers in India are managing either their first or second fund, very few are into their third fund,’’ says Raja Kumar, founder and chief executive officer of UTI Venture Funds. “As such, many are yet to prove their track record in terms of exits. Private equity is a self-correcting business where managers may not get a second chance to prove the exit track record.”

This stampede for exits may itself hurt their chances of making a profit as investors get suspicious about the quality of the company if one particular sector witnesses a flurry of offers for sale by private funds. IPOs provide the best exit route for PE investors, says Ambrish Singh of Daiwa Securities. “We do run the danger of clubbing too many real estate IPOs in the market, which can create a fatigue for investors.”

The lack of belief in their own investment decisions of the so called “risk takers” is also visible in the kinds of deals the private funds get into with companies these days. “Of late, we are seeing term sheets providing for downward protection to investors and even sharing upside with the founders beyond certain internal rate of return,’’ says Raja Kumar.

Source: Economic Times

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