Faced with a shortage of exit options and disappointing valuations, the private equity (PE) sector expects a sharp rise in strategic/secondary sale and promoter buyback of shares across companies.
Some PE players may also look to list some firms overseas to unlock value. This is because the primary exit option — listing of the firm in the domestic bourses, is largely out of consideration due to poor returns from a volatile market. Other options include trade sale to another PE/investor, or acquisition by a larger firm.
“Listing overseas is being actively looked at because for UK and US-based investors interested in participating in the India growth story, it's easier to tap the market at home than come to India,” Mr Darius Pandole, Partner, New Silk Route Advisors said.
Typically in a good year, one expects about 100 IPOs, but for a bad year, it drops to 40-50, said Mr Harish H V, Partner at Grant Thornton India, a consultancy which focuses on research in the sector.
Higher risk
“There are a lot of exits waiting to happen. I expect a lot of strategic PE deals, as investors get wary of holding investments for long. However, some who see value rising later will look to hold on to their stake,” he said.
Venture Capital/PE firms usually target returns three times the original investment over a 5-7 year period. However, early stage or angel investors may expect much higher profits over the six-times range due to the higher risk they take.
In cases where the founding promoter has capital, or other businesses to raise funds from, share buybacks will also rise, said Mr Rahul Bhasin, Managing Partner at Baring PE Partners.
With investments dating back to 1998, Baring is one of the oldest PE firms operating in India.
“We made mistakes earlier and then learnt from them. The industry is making them today. One needs to be careful in investing in sectors with a lot of regulation, such as real estate and telecom,” he said.
The PE industry also feels that the valuations of domestic firms are far from realistic, which makes it tougher to find the right buyer or to generate adequate returns.
Mr Shekhar Kundur, General Partner at early stage and growth capital firm, Ventureast, said that India is losing out to China both because it has reasonable valuations and the pool of firms to chose from is a lot bigger.
“Fund managers there get more and better exits,” he said.
roudra.b@thehindu.co.in