Private equity (PE) investors who invested a bulk of their capital at the market peak but have had few opportunities to exit their investments since 2008 are finally getting a chance to sell their holdings with many of their portfolio companies going for initial public offerings (IPOs).
A Mint analysis of nine PE funds, which have sold their investments partially through IPOs, shows that average annual returns generated by these funds is over 24%.
The average holding period is about four years.
Since many of them have only partly exited their investments, the final returns could change.
The analysis is based on the price at which the PE funds invested in a company and the price at which the shares were sold.
“Overall, it looks like a healthy time to exit investments through public share sale, and next year will be even better than this year as more companies are being groomed for their listings,” said Vishal Tulsyan, managing director and chief executive, Motilal Oswal Private Equity Advisors Pvt. Ltd.
The rosy outlook comes as a relief after a prolonged period of sub-par economic growth and poor market sentiments that had left many private equity funds in India struggling to sell their investments. Some of them had invested millions of dollars at the top of the market just before the 2008 global financial crisis.
The events not only crimped returns for private equity firms but also forced them to hold on to their investments for far longer than is the global norm.
Average gross returns to PE investors in India were 21% until 2007, according to a June McKinsey & Co. report.
After 2008, average returns from exits plunged to just 7%, the report said, adding that the average holding period for such investments also increased to 5.7 years in 2013 from 3.3 years in 2005.
Funds which have made partial exits this year through IPOs include New Silk Route, Providence Equity Partners, Jacob Ballas India, Motilal Oswal Private Equity, Zephyr Peacock India, Xander Group Inc., Norwest Venture Partners and Rabo Equity Advisors-managed India Agri Business Fund.
At 55%, Zephyr Peacock India clocked the highest return out of the lot as it partially exited its investment in Pennar Engineered Building Systems Ltd.
Zephyr had invested in the company in 2013 at Rs.58.20 per share. During its public issue, Pennar sold shares at Rs.178 apiece. This is the highest ever return clocked by the fund from any of its exits, according to the fund’s managing director Mukul Gulati.
“The activity is being driven by the way capital markets are performing. (In the) last three years, the IPO market was virtually closed. Now, we are seeing healthy activity on the IPO front,” said Gulati.
Zephyr Peacock India is the private equity arm of New York-based Zephyr Management Lp.
New Silk Route, which has partly exited two investments through recent IPOs, made a return of 40% on its investment in Hubli-based VRL Logistics Ltd.
However, its seven-year-old investment in Ortel Communications Ltd gave it compounded annual return of just 8.79%.
New Silk Route didn’t respond to queries on returns made in recent exits but said that it has had “four liquidity events this calendar year across sectors like finance, consumer, logistics and telecom”.
“Over the last few months, NSR-backed companies Café Coffee Day, VRL Logistics and Ortel Communications completed successful IPOs. In addition to these three IPO events, NSR also did a strategic sale of Destimoney Enterprises,” said the fund in an email. “NSR remains optimistic about the opportunities in the Indian market.”
Motilal Oswal PE, which had invested in Power Mech Projects Ltd in tranches, sold a part of its investment in the company at Rs.640 a share. Its initial investment in the company in 2009 was made at a price of Rs.159.82.
Another fund which has made strong returns is Rabo Equity Advisors’s India Agri Business Fund. The fund partly exited its investment in Prabhat Dairy Ltd at a price of Rs.115 per share compared to its initial entry price of Rs.49.1 per share.
Rabo Equity Advisors did not respond to an email seeking comment sent on Thursday.
The best way out for these funds is to exit through IPOs as it gives them an opportunity to offload shares in tranches, unlike in secondary market sales where the funds are required to sell their entire stake in one go, said V. Jayasankar, senior executive director and head (equity capital markets), Kotak Mahindra Capital Co.
The secondary market sales are transactions in which one PE fund sells to another.
PE funds are trying to ensure that public issues are priced on the higher side so they can compensate for the depreciation of the Indian currency over the lifecycle of the investment, said an investment banker who declined to be named.
Investments made in the 2008-09 period (the rupee traded at an average of Rs.43.39/dollar in 2008) are at a disadvantage since the currency has now weakened. The Indian currency traded at an average of Rs.63.72 a dollar this year.
As primary market sentiments have improved, a number of PE-backed firms have filed their IPO documents to provide investors an exit option and raise capital.
Seventeen companies so far have completed their IPOs this year, raising over Rs.10,000 crore.
More than 30 firms have filed draft IPO papers with the capital markets regulator, Securities and Exchange Board of India, aggregating to IPOs worth almost Rs.20,000 crore in the next 12-18 months.
“This is the first time we are witnessing such heightened activity when it comes to PEs exiting through IPOs and the pipeline and quality of IPOs look healthy,” said Mayank Rastogi, partner, private equity and transaction advisory services, at EY, a professional services firm.
To be sure, not all funds have reported strong returns.
Jacob Ballas made 8.7% (from PNC Infratech), and Norwest Ventures Partners and Xander Group could manage only 10.84% returns (from Sadbhav Infrastructure Project) from IPOs of their portfolio firms, where they partly exited their investments.
Xander disputed that returns have been low, pointing out that this is only a partial exit.
“In the public offering, we sold only 10% of our holding in Sadbhav Infrastructure at a 1.7X multiple. We continue to believe in the company’s growth potential and execution capability. With India poised for growth, interest rates reducing and the capex cycle restarting, we are convinced that SIPL (Sadbhav Infrastructure Project Ltd) will forge further ahead,” said Rohan Sikri, partner, Xander Investment Management.
Sohil Chand, managing director, Norwest Venture Partners, said that returns will improve.
“We think the future prospects for SIPL are very bright and are optimistic that the stock will perform very well, going forward,” said Chand.
Srinivas Chidambaram, managing director, Jacob Ballas Capital India Pvt. Ltd, declined to comment as he was traveling.
“If the period of investment and depreciation of the rupee is factored in, we don’t think they would have made significant returns,” said Sanjeev Krishan, leader (transaction services and private equity), PwC India.
Krishan said that secondary sale has been a preferred option for PE funds and most well-run businesses have seen a secondary sale. “We have noticed that IPO is only a fallback option.”
Between January and July this year, PE funds exited $6 billion in Indian investments, according to researcher Venture Intelligence.
Information technology (IT/ITes), banking financial services, telecom, and media and entertainment industries have led the list of successful exits in 2015, returning $2.4 billion, $1 billion, $770 million and $280 million, respectively to investors.
This article was first published on Livemint.com
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