Private equity investors find new ways to cash out

Media coverage of the private equity industry in India has largely been focussed on the size of new investments.

With investments of over $7 billion, private equity is now an established source of funding in India.

But it is time that the discussion about the industry expanded to include the subject of exits (sale of stake to cash out) by an investor as well. 2012 was a near-record year for Indian private equity with exits valued at $4.5 billion, close to the 2010 peak for exits valued at $4.6 billion.

India has the benefit of a long-standing capital market with one of the largest numbers of stocks listed in the world. The successful IPOs of private equity funded companies such as Bharti, Shoppers Stop, India Infoline, Infoedge and PVR has led many to believe that private equity investments would be exited mainly through IPOs. However, IPO exits are linked to market sentiment.

Therefore, IPOs accounted for a mere 8 per cent of the exits by private equity investors between January 2005 and September 2011. But 44 per cent of the exits during the same period were from private transactions — stake sale to a strategic buyer or financial investor.

Exit through private transactions receives less attention but delivers strong results.

Pick-up in strategic sales

Purchasers in private transactions include domestic and international, financial and strategic investors.

A few instances are ICICI Venture’s stake sale in Metropolis to Warburg Pincus, Motilal Oswal Private Equity’s stake sale in Parag Milk Foods to IDFC Private Equity and Actis’ stake sale in Punjab Tractors to Mahindra and Mahindra.

When a private equity fund is invested in a business, finding strategic investors becomes much easier.

The incoming investor derives comfort about the company’s corporate governance, systems, processes and information quality. There is also the possibility that in a few cases, the promoters may exit along with the fund to a strategic buyer in a private transaction.

Recent private transactions in Paras Pharmaceuticals and Patni Computers Systems have shown that promoter exits can be a successful and socially acceptable way to create value.

This trend of more private transactions vis-à-vis limited exits by IPO has implications for the entire private equity ecosystem.

The discussion on exits is no longer limited to capital market conditions. Limited Partners would increasingly seek to invest in funds pursuing a private transaction exit strategy.

Private equity funds, in turn, are likely to seek businesses that have the potential to be sold to buyers/investors and promoters.

This makes investments in smaller companies a viable option too. Even if the company is not likely to scale up to the size of an IPO, it may attract private equity money.

The private equity and venture capital industry is also maturing and growing in depth. The equity funding lifecycle for companies is developing from ‘one funding before IPO’ to a situation where a company would see multiple rounds of investment.

It may even be sold off without ever listing on the stock market. Investors wanting to benefit from the growth of these private companies are investing in private equity funds too.

The private transaction or strategic sale route has been the unsung hero for the private equity industry. It is transforming the very nature of private equity business in India.

(The author is Managing Partner, ASK Pravi Capital Advisors)

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