The rise in the stock market in the past year may have brought cheer to most investors, but not to private equity (PE) funds. The equity rebound has had promoters demanding valuations 20-30% higher than the estimates of PE investors.
The mismatch is resulting in at least one-third of the deals under negotiations falling through, say PE firms. This is on top of the usual 30-40% drop in deals in the initial stages because of hurdles over business plans, management teams or performance.
“That (stock market rise) tends to impact deal closings as certain promoters, who may have been happy at the valuations discussed pre-surge, try to renegotiate valuations upward when markets surge,” said Jacob Kurian, partner at PE fund New Silk Route Advisors Pvt. Ltd.
K. Srinivasan, managing partner at BTS Investment Advisors Pvt. Ltd, said the stock market surge “is definitely not helping us in deal closing. Valuations are shooting through the roof”.
The PE firm recently had to pull out of a deal that was close to being finalized after the promoter began demanding a higher valuation when the equity markets rose, he added without naming the company.
India’s key Sensex index has gone up by nearly 15% over the past 12 months, but has been volatile this year, shedding 6% since 1 January. On Wednesday, it dropped 2.8%, or 467.27 points, to end at 16,408.49.
Milestone Religare Investment Advisors Pvt. Ltd said one-third of its deals were squashed this year because of demand for higher valuations.
The PE firm, a joint venture between Milestone Group and Religare Enterprises Ltd, now resorts to a convertible structure of investment if it’s keen on a firm despite a mismatch.
“We link it to the performance of the company than paying upfront,” said Rajesh Singhal, managing partner of Milestone Religare.
Some potential deals that have fallen through in recent months because of differences in valuations involve Chennai-based Sanmar Group and Bangalore’s Sobha Developers Ltd, said an investment banker close to the deals, requesting anonymity.
Sanmar declined comment. J.C. Sharma, managing director (MD) of Sobha Developers, said the company is not actively talking with PE firms, but added valuations were a challenge. “PEs are cautious compared to how they were in 2007,” he said.
M. Murali, MD of Shriram Properties Ltd, said PE firms are being pessimistic. The unlisted realty firm has been in talks with PE firms the past few months for raising funds for its various projects through special purpose vehicles.
“Valuations for projects are done on the basis of land cost, which can differ greatly from person to person. PEs are looking at pessimistic valuations, while promoters want more affirmative valuations,” said Murali. “Both sets are greedy.”
The haggling has made some investors decide not to pay above their estimates.
“We are clear that if a promoter tries to play a bargain game with us, we would not pursue talks for that deal,” said Harshal J. Shah, chief executive of Reliance Venture Asset Management Ltd.
The result of all this: fewer deals. “People (PE firms) are happy doing two-three deals a year. We will see lower volume of PE deals, but substantial investments,” said Vikram Utamsingh, executive director at consultancy KPMG India.
Source: Livemint