If numbers tell a story, then this is a telling one about private equity exits in India, which are getting difficult even though investments and new funds are picking up. Fathom this: There were 72 PE exits valued at $2,226.61 million in January 1 to June 13, 2010, while the corresponding period for 2011 has witnessed only 47 exits valued at $1,296.21 million.
Exits are important for a PE firm, as it allows the firm to generate returns to give back to its limited partners (investors in the fund) and is an indicator of successful fund management.
While open market, M&A and secondary exits have all tanked, open market exits have particularly felt the pinch. VCCEdge data reveal there have been just 13 open market exits, valued at $133.82 million, in 2011 — nearly half of the 25 exits for $376 million seen in the corresponding period last year. M&A exits this year were just 12 against 22 deals in 2010 in the corresponding period.
The few notable open market exits in 2011 include SAIF Partners’ Havells India exit of $13.81 million, Citi Venture Capital International Growth Fund exit of JBF Industries of $20.9 million, India Advantage Fund Series I exit of VA Tech Wabag of $35.53 million and Orient Global Tamarind Fund exit of Yes Bank of $47 million.
Kunal Shrivastava, research director, VCCEdge, explains that PE exits have been observed to move in tandem with stock markets, with public companies serving as benchmarks for exit valuations.
“Last year was no exception, with exit activity picking up as the Sensex soared after a turbulent 2008-09. Several PE/VC investors cashed out in 2010 while the valuations were high, but the momentum started to fade out early this year due to a sluggish and volatile stock market reacting to corruption scandals, inflation and rising regulatory concerns,” Shrivastava said.
For the record, the Sensex dropped 4% (almost 800 points) during May 2011.
The sentiment is echoed by Sumant Mandal, managing director, Clearstone Venture Partners, who predicts temporary lulls in the market as macro news affects sentiment and liquidity, and Darius Pandole, partner, New Silk Route Advisors, who points out that market volatility complicates exit timing and valuations. Pandole adds that the principal avenue for PE exits in India still remains the public market.
As Vikram Utamsingh, executive director and head of private equity, KPMG, points out, all this is putting pressure on general partners, who are hard pressed to show meaningful exits, especially at a time when limited partners expect at least 16% returns from India. He adds that this slowdown in deals is also forcing promoters and investors to hold on to investment closely until they get the right valuations.
Keshav Mishra, head of investments, Baring Private Equity Partners, describes it as a Catch-22 situation for investors, who are not only apprehensive about deploying fresh capital, but also about the decision and timing of the exit.
A saving grace for PE funds has been IPO exits with eight new PE-backed IPOs filed so far this year. But PE-backed IPO exits, too, are not without riders and not all have been successful like the Muthoot Finance and Lovable Lingerie IPOs.
Sanjeev Bhalla, head, equities & alternatives, Bank of Bahrain & Kuwait, spells out that sentiment has to be positive in the secondary market for a successful IPO in a primary market.
“In today’s market, coming up with an IPO involves several uncertainties, as investors have become very selective. Moreover, majority of primary offerings this year are trading below issue price. The aggressive participation of institutional investors in recent IPOs is missing and it is not expected that primary markets will revive in the near future.” He adds that going ahead, it will become hard for PE firms to keep putting money into small businesses unless they see a profitable exit available.
In this scenario, valuations are becoming a major concern in the IPO exit space. Vibhor Mehra, partner, SAIF Partners, confirms that as valuations may vary, companies may calibrate IPO timelines based on the urgency of their fund requirements and their view on the market going forward. The increase in minimum float requirement for companies below a certain market cap has also added to the sensitivity around IPO valuations.
Mohanjit Jolly, managing director, Draper Fisher Jurvetson India, affirms that for an overseas IPO, the story has to be incredibly strong (MakeMyTrip on the Nasdaq), with a clear leader in a large and growing space showing significant revenue traction.
“There are very few companies that can at this time meet all the needed parameters of revenue, growth and profitability. There is more pressure on companies to show solid financials going into an IPO, with a clear path to significant toplines and healthy bottomlines.”
On the M&A front, Jolly adds that Indian companies have not shown a propensity towards acquisition of smaller Indian companies and definitely not at premiums that get investors or entrepreneurs excited.
“However, foreign entities will make build versus buy decisions because anyone worth anything is either already in India or seriously considering entering the Indian market. The key question is what types of premiums might the acquiring entity pay,” he adds.
Source: Financial Express