PE Funds Choose Open Markets to Exit; They are Making Money Too
Madhav A Chanchani
Number of PEs who invested in 2004-2005 has chosen to exit, following the election of a strongpro-reform government.
Going by the state of capital markets in the early months of 2009, it really did not look like 2009 will be the year of exits for private equity (PE) funds. But if the recent market action is any indication, this may well be the year of open market exits. PE funds like ChrysCapital, Citi Venture Capital International (CVCI), Sequoia Capital India, 2i Capital, IL&FS Investment Managers (IIML) and the 3i Group have sold stakes in their portfolio companies either partially or fully.
The exits started trickling down from March and hit a high pitch after the markets rallied in response to the election results of 16 May 2008. Last week, ChrysCapital sold a 5% stake in Chennai-based truck financer Shriram Transport Finance Company for Rs 300 crore. By the way, it was not a distress sale. ChrysCapital has made a cool 8.5x returns from this deal. Also, AIF Capital sold its stake in Yes Bank mid-May, making 5.8x on its investment. CVCI followed with its exit in drugmaker Lupin Laboratories, making 3x returns. All these investments were done before 2005, and it seems that PE funds were looking for a (relief) rally to exit them.
Indian stock markets have been on a rally since 9 March as the Sensex rose from 8,160 points to 13,913 points on 25 May. On 18 May, when markets opened for the first time after the election results were announced with a strong pro-reform government coming to power, the Sensex jumped by 2,100 points to 14,272 points.
It was the kind of a rally that PE funds were looking to offload their shares. Especially at a time when many foreign investors have returned to the Indian markets. There was appetite for shares. "Manmohan Singh without the Left, that is [a] dream come true for most foreign investors," says Praveen Chakravarty, COO and head of institutional equities sales at BNP Paribas India, explaining the sudden influx of buyers into the equity markets.
Most PIPE (private investment in public equity) deals have seen significant value erosion when markets plunged in the post-Lehman Brothers bankruptcy. Since the rally, these stocks have recovered their losses. “Expectations are that this is again a bubble that has arisen which will re-adjust to a more sensible level in due course, especially before the 31 July budget comes out,” says Vikram Utamsingh, the executive director and head of private equity advisory at KPMG. If a pro-reform budget is introduced with steps to ease FDI norms and disinvestment etc, the markets could rally up again.
Also, most of the exits have been made from investments done between 2004 and early 2006 – before the mad rush started. So, even if some of these exits were not able to make profits, they were still in green. “The funds that invested in 2006 and 2007, their exit point will still be below their cost,” said CG Srividya, specialist advisory services partner in Grant Thornton India.
However, the fact is some of these exits have been made at good multiples, contradicting the disbeliefs of most people in the PE industry in the beginning of 2009. Also, some of these exits may have been planned for last year, but did not go through due to the dramatic fall in markets.
“Last year there were very few exits, valuations weren’t what were expected. In fact some of these funds have also shown impairment in their reporting,” said Srividya. Because there were not many exits last year, it is possible that some of these funds are holding portfolios larger than they had planned.
“These funds also have large portfolios, and it makes sense for them to dilute on an ongoing basis,” adds Utamsingh. While CVCI is believed to have a portfolio of 30 companies, ChrysCapital also holds stake in more than two dozen companies. Sequoia and IIML also have huge portfolios.
Since most of these were part exits, PE investors may be looking to get back the amount they invested. “Some of these people have holdings since 2005 to 2006, and if anything, they would like to come out with their cost so that what remains in the company is pure profit,” said Utamsingh.
There were some quick flips in the markets too; while Standard Chartered Private Equity (SCPE) has invested further to average its investment in Mahindra Financial Services and ABG Shipyard, it also sold half of its stake in Karur Vysya Bank. The sale came just three months after it picked up a 4.42% stake from open markets in February for a sum of Rs 47.43 crore. While the fund entered at Rs 198, it has sold the stake for Rs 265 in the post-election results rally.
However, the investments made in the later part of 2006 or 2007 have not made for good exits. Take the example of CVCI’s part exit of Techno Electric & Engg Co, a Kolkata-based engineering, procurement and construction (EPC) firm focused on the power sector. CVCI sold a 4.96% stake in the firm for a share price of Rs 72, while its entry point was at Rs 70. This investment was done in October 2006.
You win some and lose some, but PE funds will now have an exit track record to show when they go back shopping for funds to their investors next time.