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Private equity investors get meagre returns from IPOs

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Earnings only marginally higher than Sensex for most.

BL Research Bureau

The private equity investors exiting companies that entered the market in recent times have had little cause for cheer.

Their investments, nurtured over a number of years in many cases, have done not much better than the market as a whole .

Private equity investors who sold their holdings in the initial public offerings that hit the market between September 2009 and now, made returns that ranged just between 7.5 per cent and 30 per cent. Barring a couple of exceptions, most of them managed returns that were only marginally higher than the Sensex returns during their holding periods.

PE exits back

With the primary market looking livelier, private equity investors are looking to use it as the exit door. ThinkSoft Global Services, Jubilant FooodWorks, DB Corp, Cox and Kings (India) and IL&FS Transportation Networks are some of the recent IPOs that saw big-ticket private equity/venture capital firms such as Warburg Pincus, Deutsche Securities and Credit Suisse, cashing out their investments. These companies either sold their equity holdings partly or in entirety. Eight of the 27 IPOs that tapped the equity market between September 2009 and now, saw private equity investors and venture capital firms offloading stake. PE/VC investors garnered nearly Rs 900 crore in cash through these offers.

Small margin

Having taken the higher risk of investing in companies still in a nascent stage of growth, these investors have not beaten the market by a big margin. In the case of ThinkSoft and Jubilant FoodWorks, the respective PE investors beat the market by a mere three percentage and one percentage point respectively. In the case of Infinite Computer Solutions, the Sensex returns were higher by a good five percentage points over the PE investor's return based on an average holding period. The Sensex clearly was an outperformer beginning April 2004 until the stock's listing in 2010.

Exceptions

The case of Hathway Cable and Datacom was different. Monet, a foreign venture capital investor in this company, partly exited its holdings in February, making a 15 per cent compounded annual return since its entry in May 2007. That compares with a meagre 4.5 per cent return on the Sensex over the period.

A hefty bonus issue by Hathway in 2007 was what perhaps led to superior performance as it reduced the VC's average cost. The Sensex return was also muted from the highs of 2007. MSPI, another investor in the same company, was however not as lucky. It managed a 7.5 per cent annualised return compared with the Sensex's return of 12 per cent over the company's holding period since June 2008. Both the investors in Hathway have only sold part of their holdings.

Interestingly, in the case of IL&FS Transportation Networks, which was one of the few infrastructure IPOs that saw PE exits in recent times, the PE investor made a good 20 percentage points higher than the Sensex, since its entry in December 2006.

The weighted-average holding period for each of these private equity investors were calculated to compare similar-period returns for the Sensex.

Besides the conservative pricing in the case of the recent IPOs, thanks to volatile market conditions, superior investment opportunities available in the listed space could be reasons for underperformance.

Related Stories:
Good scope for venture capital, pvt equity firms
PE investments down 62%
PE infrastructure investments to go up within a year: survey

(This article was published in the Business Line print edition dated March 21, 2010)
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