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Neha Kaushik

Large number of deals `falling through'

New Delhi , May 13

Even as the value of private equity deals touch $2.3 billion in the first four months of 2006 with more than 100 private equity/venture capital firms operating in the country, a large number of deals are "falling through'' at the closing stages.

Private equity analysts point out that while the absolute number of successful deals has increased, there is also a corresponding rise in deals not working out.

The reasons cited most commonly are differences over valuation, as companies can now raise money in the buoyant stock markets, combined with the fact that family owned businesses are finding it difficult to "hand over rights" to a private equity firm in view of the availability of numerous funding options.

An official from a cement firm based in Eastern India, which is looking to raise funds for its expansion plans says that though the company has spoken to several private equity firms, he would prefer to go in for an IPO to raise money as it not only provides better valuation, it also does not come with any strings attached in the form of handing over "certain special rights" which private equity firms demand.

Tapping markets

"This scenario is especially the case in family owned businesses where there is no clear demarcation between the management and the owners. Everyone seems to think that they can go in for an IPO given the current valuations," Mr Sanjeev Krishnan, Associate Director, PricewaterhouseCoopers, said. Further, it has now become a case of too much money chasing too few good deals.

Unlike in the past, a lot of companies are now going public as opposed to opting for private equity at an earlier stage of their growth cycle.

"With the indices on a high, companies hoping for better valuations can easily choose to tap the stock markets," Mr Saurabh Srivastava, President, Indian Venture Capital Association, said.

Market watchers point out that recently a deal between a private equity and a South India based FMCG major fell through in the final stages after months of negotiations, as the company's promoters could not agree to a final valuation price.

In fact, this is one of the reasons why there are not many instances of buyout deals, despite the entry of many buyout specialist firms into the country and pre-IPO placements are accounting for a large percentage of the private equity deals being struck.

"Companies should be a little cautious while going public. Though there is a smart rally in the stock markets at present, but if the tide turns it could be very challenging for firms which have gone public at early stages," points out an official from a private equity firm.

For now, domestic firms are bargaining hard with valuations soaring. A case in point is tractor maker International Tractors (which makes the Sonalika brand of tractors), which recently offloaded stake to 3i after months of negotiating with at least two to three other firms. The company is now looking to offload another 7-10 per cent to a private equity firm and officials claim that they are currently talking to about four to five players for the same.

More Stories on : Private Placement | Venture Capital | IPOs

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