Yet another pure private equity player is looking to list on stock exchanges.
Milestone Capital Advisors has filed a draft-red-herring prospectus with the Securities and Exchange Board of India for an initial public offering (IPO).
It would be the first private equity (PE) fund since IL&FS Investment Managers to raise capital through this route.
The latest move raises questions on the valuation of such companies and whether Indian investors are ready for them, considering the business model is completely different.
PE funds raise capital from various investors — individuals and institutions both domestic and global — and invest the funds mostly in unlisted companies, which offer chances of greater returns, but also carry greater risk.
Also, these firms tend to be secretive about the deals they do, the percentage of stake they buy in companies, the price at which the stake is bought and sometimes even about the existence of such investments as their investors do not want them to be in the limelight.
The balance sheet, too, doesn’t have tangible assets and so, it is a different ball game.
“You are invested and are managing companies that are looking to list and you yourself get listed. There is a bit of a contradiction there,” said the head of a large private equity fund in the country.
“Once you get listed, you will have to disclose important things such as compensation pattern (salaries) and profitability. So, all the investors know the returns you have made,” said the head.
The other listed firm, IL&FS Investment Managers, is the erstwhile Creditcapital Venture Fund, which went public in 1990 with 34 lakh shares worth Rs 3.4 crore. The issue was subscribed 12.09 times. Subsequently, the company was acquired by IL&FS and its name changed, first to IL&FS Venture Corporation in 1997 and then to IL&FS Investment Managers in 2002.
IndiaCo Ventures, however, didn’t go for an IPO to get listed. It acquired another listed company, Shivaji Securities and renamed it.
“Our motive was different. We were not looking to raise money via an IPO. We have funds to invest in companies. We wanted to set an example that one can be transparent. We have done that,” said Rahul Patwardhan, vice chairman, IndiaCo Ventures.
To the criticism on PEs being secretive, he said, “We are open for disclosures. Whoever is trying to get information will get it. It is not completely secret. One can go to the Registrar of Companies and get information on all listed and unlisted companies. It is not rocket science.”
Patwardhan concedes that India is not ready for capital raising. “It is difficult for retail investors to understand the PE play. There are times when there are substantial revenues and others when there aren’t any. Indian investors are used to looking at the quarter-on-quarter growth, but PE is not about that,” he said.
But isn’t it more difficult for a listed PE fund to raise funds from limited partners (LPs), who are investors whose money gets collected and invested in various companies, Patwardhan replied in the negative. “Not really. It becomes easier.”
Milestone Capital Advisors, though, asserts that Indian investors understand the business all right. “They do understand. It is a long-term business. We want to grow our existing business via the IPO proceeds,” said Ved Prakash Arya, the managing director.
Other funds say it has been done abroad where Blackstone got listed and KKR too was planning a listing. “It can be evaluated based on the portfolio. How you price it is a question,” said another private equity fund operator.
Merchant bankers point out that the issue offers small investors a chance to participate in PE business. “It is another asset class that is being thrown open to investors. It is usually the wealthy investors who can invest, but now smaller chunks of money can be invested,” said a merchant banker, requesting not to be named.
“Just think of it as another financial services company, as any distribution company or an investment company. If it is making returns, one can look at it,” said another merchant banker, while conceding that “getting retail participation will require a lot of awareness.”
Many experts even suggest valuing a PE fund by the size of the funds being managed by it.
It is clear nevertheless that investors would have to tweak their view of looking at the balance sheet. “Truly speaking, profitability is not regular, the income is not stable,” said the head of the large private equity fund.
Source: DNA India