December 2008
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PE stay put even as valuations dive

Although they’re not buying, private equity (PE) firms aren’t panic-selling either. The number of investment exits or selloffs by PE and venture capital (VC) firms dropped by a whopping 70% to just 12 companies during April-December from 60 companies in the corresponding period last financial year, according to data compiled by Venture Intelligence, a firm that tracks PE and VC developments in India.

In terms of value, PE firms encashed $750 million through exits this fiscal as against $1.7 billion during the nine-month period last year. The exits have primarily been in the IT/ITeS, manufacturing and healthcare and lifesciences sectors.

Fund managers ET spoke to indicated that there was nothing to panic about and that the slowdown will only help investors understand and appreciate the fact that returns are going to be less attractive than before. ”PE firms usually take a medium to long-term growth perspective into consideration. We, at Actis, are positive on the Indian growth story in the medium term,” JM Trivedi, partner and South Asia head, said.

Venture Intelligence CEO Arun Natarajan said: ”Corrections were slated to happen in the PE industry, especially since valuations in the country’s share market were so high over the past few years. Now that PE firms are taking a disciplined approach to deploy capital, the number of deals will automatically come down.”

So far this year, PE investors have sold shares in eight firms pocketing $630 million, while VC firms have cashed in $120 million through four deals. Last fiscal, PE firms sold their investments in 41 companies netting $1.19 billion in the process, while VC sector made $510 million from 19 exits.

In addition, there were five PE-backed initial public offerings (IPO) from which newly listed firms raised close to $295 million this year as against 11 such issues that garnered $995 million last year. Typically, a PE firm exits its investments either through a trade sale to a rival firm in the same sector or through a public listing.

A trade sale is the most common form of exit as buyers in the same industry are often more likely to realise synergies and are, therefore, the most natural buyers of the business, besides selling stake to other PE firms.

There are more than 366 PE firms operating in India currently. The industry has witnessed a significant growth in the last few years with investments going up from $2 billion in 2005 to close to $17 billion in 2008, according to Venture Intelligence estimates.

Source: Economic Times

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