Availability of ample dry powder with private equity (PE) firms and the absence of a window for launching initial public offers (IPOs), owing to uncertainty around the outcome of the general election next year, will lead more PEs to seek exit through secondary transactions in 2019, say bankers and investors.
Secondary deals, or sale of investments by PE firms to other PEs or strategic investors, are likely to be the flavour of the next calendar year, with empirical data already showing an uptick in such transactions.
According to private capital tracker Venture Intelligence, PE and venture capital (VC) exits through the secondary sale route are steadily going up, both in terms of volume and value. In 2017, 57 secondary exits worth $3.3 billion were recorded, as against the 58 deals totaling $5.4 billion for 2018. In 2016, 50 secondary deals worth $1.9 billion were recorded.
Besides, PE and VC exits through IPOs have started declining with 2018 recording only 13 PE and VC exits worth $864 million, as against the 23 exits worth $1.25 billion in the year-ago. IPOs launched in 2018 were also lower, both in terms of volume and value, after peaking in 2017. Twenty-four IPOs worth ₹30,959 crore were launched this year, against 36 IPOs worth ₹67,147 crore in 2017.
“Unlike in the last couple of years, the window available for launching IPOs will not be a continuous one next year. Instead, there are likely to be multiple short windows available for listing, given the choppy markets and subdued investor sentiment, globally, as well as local uncertainties around the upcoming general elections,” said Padmanabh Sinha, managing partner, Tata Opportunities Fund.
Sinha added that the interest and dry powder for India continues to be plentiful among strategic investors, sovereign and pension funds and private equity investors.
A win by the Bharatiya Janata Party (BJP) in the 2014 general elections boosted investor sentiment, opening up long-subdued capital markets. Consequently, several PE firms had launched new funds amid growing investor interest. The pipeline of PE deals, however, is expected to remain strong.
“Over the last 2-3 years, we have seen a lot of PE firms generating robust returns on exits, especially through IPOs. This has also been accompanied by fresh funds being raised by private equity investors. So, we expect both primary and secondary deals on the private equity space as long as valuations are reasonable,” said Pinak Rudra Bhattacharyya, vice president, investment banking, IIFL.
Vivek Soni, partner and national leader, private equity services, EY, had similar views. He said availability of excess funds, especially with Chinese and Japanese investors, will also give an impetus to secondary deals against a backdrop of volatile capital markets owing to global factors playing out.
“In 2019, global factors such as Fed tightening, trade wars, Brexit, crude oil prices and, to some extent, the Lok Sabha elections, will continue to bear on the volatility and performance of the Indian capital markets. Things could change after the elections, as historically, Indian equity markets have demonstrated a tendency to rally post-election results. But, that in our view, depends a lot on the nature of the electoral mandate,” said Soni.
This article was first published on livemint.com.