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Sunday, September 25, 2011

On PE Street, exit doors hardly open

This story first appeared in DNA Money edition on Thursday, September 22, 2011.

The prolonged funk in the primary market has meant private equity players continue to stare longingly at the exit door.

With three quarters of the calendar year gone, there have been only 86 exits valued at $2.1 billion so far, about half the 174 worth $4.5 billion seen in 2010, according to data from VCCEdge.

Generally speaking, private equity firms head for the exit 3 to 7 years after investing in a company — with the most preferred route being initial public offerings.

Partha Choudhury, managing director, SEAF India Investment Advisors, a private equity firm, said the refrain in 2010 was that the optimism of the IPO market will continue into 2011, but that was not to be.

“As the year progressed, people realised that it wouldn’t make sense to take companies with just `100-150 crore turnover public. The IPO threshold was later identified as companies with over Rs250 crore in turnover with a potential for phenomenal returns. As a result, a lot of floats scheduled this year have been stalled,” said Choudhury.

According to VCCEdge data, of the 86 exits in 2011, 27 worth $633 million were through open market sales, and 22 worth $1,07 billion through mergers & acquisitions.

There were 14 exits through buybacks (company buying out the investor) generating $79 million, while only 12 were through IPOs which generated $78 million.

As many as 11 were secondary sales (private equity or venture capital firm buying out the existing investor) with an overall exit value of $241 million.

Consultants advising on exit strategies said the secondary market continues to be the preferred door.

Jacob Mathew, managing director, MAPE Advisory Group, an investment consultancy, said the current equity levels continue to offer great opportunities for secondary transactions.

“A lot of PE/VC investments are milestone-driven. There are times when the existing investor feels his investment milestone has been achieved and is fairly satisfied with the returns generated, he takes a call on exiting through the secondary route. This particularly happens with invested companies wherein the new investor is also able to achieve the investment milestone and return expectations. Once these conditions are fulfilled, it leads to a successful conclusion of a secondary deal,” said Mathew.

Very recently, MAPE advised Olympus Capital on a secondary deal wherein Olympus acquired Axis Private Equity’s (through its Axis Infrastructure Fund I) stake in Hyderabad-based Vishwa Infrastructures and Services for Rs240 crore, giving Axis over 4 times returns on its Rs60 crore investment (for a 35.6% stake) in 2008.

Sanjeev Krishnan, executive director - transactions group, PricewaterhouseCoopers, said exits this year will largely be a combination of secondary and strategic deals.

“Of the two options, secondary is certainly seeing more traction. Strategic sales as an exit strategy will be impacted because the markets in Europe and the US are not as buoyant as they were in 2010,” he said.

As far as the overall PE/VC exits momentum going forward in the current year is concerned, industry experts feel that the pace will be more or less the same with secondary transactions being the most sought after option for exits after M&A and open market sale.

But the broad consensus remains that sluggishness will continue in terms of exits because there are no data points indicating improving scenario.

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