Concerned over the poor record of private equity (PE) exits in India, PE firms have been looking at new routes of divestment and new asset classes in which to invest.
A panel discussion on “Promoter Relationships, Realising Exits, Corporate Landscape” at the first Mint Private Equity Conclave brought together PE firm partners and senior managers of companies that have been successful exits.
“I’ve been here for 25 years now and in the last decade and the big issue has been exits”, Darius Pandole, managing director (MD) and chief executive officer (CEO) at JM Financial Investment Management, said. “… exits have not happened with the frequency and returns people expected.”
Pandole added that the buyouts market has been improving steadily, given that India is a still maturing PE ecosystem.
In its India Private Equity Report 2016, management consulting firm Bain and Company said the number of exits increased 10% year-on-year in 2015. The value of exited investments grew 57% to $9.4 billion (Rs62,751.29 crore) in the same period.
PE executives emphasized that successful exits were of paramount concern to limited partners (LPs), who invest capital in PE firms; exits ensure that PE firms deliver returns to LPs, helping them raise a second fund.
Several funds in India have unutilized capital and unrealized investments even in the seventh or eighth year. A case in point are PE investors in National Stock Exchange of India Ltd.
“India is a tough country,” said Sohail Chand, managing director of Norwest Venture Partners’ India unit. “On paper, it is an amazing investment, with great core investors, and a recession-proof business model. But the management decided it did not want a liquidity event. It took us seven to eight years to turn that around and now the company is filing to go public. It takes a lot of dialogue and persuasion.”
Chand added that investors sometimes find themselves putting money in sectors with high valuations at the time of investment, but whose value falls industry-wide years later.
“Investors have made money from IT and financial services, and in pharma,” Chand said. “But they have gotten stuck in sectors like infrastructure and manufacturing.”
Given these realities, investors are looking at alternatives to the traditional IPO exit routes. “We’re seeing a lot of leveraged buyouts, and a new form of exits with PE firm-to-PE firm sale in the last few years as the (PE) industry gets more segmented,” Pandole said. “This will only grow.”
Moderator Tarun Bhatia, managing director of risk management firm Kroll India, suggested stressed assets as a possible investment avenue for a viable exit and entry for PE firms looking to deploy remaining capital.
“2017 will be an excellent year for M&A (mergers and acquisitions) and for private equity,” said Nagaraj Garla, MD and CEO of IDBI Capital. “The driver will be buyouts, and the sale of stressed assets…”
However, others weren’t so optimistic about entering the stressed assets market. Shyam Sundar S.G., MD of Morgan Stanley Infrastructure, said the asset class required “its own set of skills”, saying the company had decided that it was a “difficult game to play”.
This story was first published on Livemint