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Volatile stock markets and the lack of participation from retail investors may have led to a drop in revenues for brokers. But valuations of brokerages are turning attractive for private equity investors.
“Private equity investors who specialise in investing in the financial services sector are definitely scouting for opportunities in this space. At a time like this it makes sense for them to invest in brokerages offering good valuations. These investors usually have a long term investment horizon and expect an average Internal Rate of Return (IRR) of 20-25 per cent,” said an investment banker.
Although there were hardly any such investments in the first half of the year, private equity investments in this space saw a sharp rise later in the year, to around $89 million in 2011 (year-to-date), according to Venture Intelligence, a research service focused on private equity and mergers and acquisitions (M&A).
Recently, private equity major Carlyle Group invested Rs 85.9 crore in Edelweiss Financial Services. Through this investment, the group bought a 3.85 per cent stake in the company from the open market. In September, the group raised its stake in brokerage and financial services firm, India Infoline (IIFL) to 9 per cent from 6.7 per cent.
Global investment firm, KKR & Co. L.P. pumped in $30 million in Way2Wealth, a financial services firm, in September 2011.
There are many PE firms scouting for opportunities in this space, said the investment banker.
“The valuations offered at this time are very reasonable and it is great to invest in a listed company which will give good returns in the long run. Although I don't see a spurt in investments like in 2007, there have been some good deals recently,” said Mr Ajay Jindal, Executive Director, Four-S Services, which provides research, financial consulting and investment banking services to companies.
In 2007, there were a number of private equity investments in the broking space. Data from Venture Intelligence show that there were around 13 private equity deals worth $679 million in 2007.
One of the biggest deals in that year was Citi Venture Capital International's (CVCI's) investment of around Rs 600 crore in retail brokerage Sharekhan. It has been four years now and Sharekhan's customers have more than doubled. CVCI holds as much as 60 per cent stake in Sharekhan.
Long-term returns
“For private equity investors and venture capitalists, these investments are good because they look at a long term return. Investors look at getting good money multiples. To get that kind of money, they should be invested in the company for five to eight years,” said a private equity investor.
The investment trends in the broking space show that much of the investments have been made in firms that have multiple financial arms along with the main brokerage activity. “Investing in a purely retail broking firm would not generate substantial profits. Many private equity investors look at investing in a firm which has multiple arms like wealth management, etc.,” said Mr Jindal.
PE investors in the financial services sector prefer broking companies to banks. “There are many restrictions in the banking sector in terms of cap on ownership.
“Restrictions are relatively relaxed in the broking space and private equity investors prefer investing in a place where they get a larger percentage of ownership,” said a leading PE investor who did not wish to be named.
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