Profitable exits in sight for private equity firms

Written by Nitin Shrivastava | Mumbai | Updated: Jul 13 2014, 05:49am hrs
PE fundsMost exits so far have taken place via the secondary deals and public market sale route.
With stock markets scaling new peaks and foreign investors more bullish on India than ever before, theres a good chance private equity (PE) firms will soon be able to sell some of the investments they have been holding on to for years at good valuations.

The exit route for PE investors has been rather tough, with investors taking home just over $31 billion in the past six years; in the last decade they invested over $90 billion, a report from Bain & Co notes.

Most exits so far have taken place via the secondary deals and public market sale route. Lack of strategic investors and IPO exits had forced investors to hold on to their investments. In 2013, there were only three IPO exits, as per VCC Edge data.

But with strong investor sentiment, a raft of IPOs is expected to hit the markets over the next few months.

Among the investments that are likely to be offloaded soon are those in Coffee Day Resorts holding company of Cafe Coffee Day backed by PEs NSR Partners, KKR and Standard Chartered PE and the solar energy arm of Hindustan Power Projects in which Blackstone has a stake. Ballarpur International Graphic Paper Holdings the holding company of Ballarpur Paper Holdings in which JP Morgan and GIC Special Investments have stakes might also list overseas, the promoters indicated to the stock exchange.

Arpan Sheth, PE consulting practice head at Bain & Company, believes that PE exits will be accelerated by two key drivers greater liquidity in the market due to higher retail and institutional investor interest, and attractive market multiples available in public markets.

Udai Dhawan, MD & India head, Standard Chartered Private Equity, believes that current market environment offers good opportunities for liquidity and they have a high quality portfolio wherein some companies are ripe for listing.

Multiples have, indeed, expanded, partly driven by sentiment, particularly in sectors like infrastructure and industrial that were struggling and had little visible recovery earlier. While actual performance will take time to pick up, what has fundamentally changed is the medium and long term industrial outlook in the hope that the new government will do all the right things to revive the economy, said Dhawan.

For instance, Myntras valuation has seen a sharp appreciation from $250 million in November 2013 (when Premji Invest and other PE players invested $50 million) to $330 million in May 2014 (acquisition by Flipkart), driven by buoyant investor sentiments.

Darius Pandole, partner at New Silk Route Advisors which owns stakes in Coffee Day Resorts, Reliance Infratel, 9X Media believes that valuations right now are more rational than those prevailing during the boom time of 2006-07. It is very likely that over the next one or two years the valuations might improve further, he said.

In the manufacturing sector, industries have been operating at sub-optimal levels and even a modest pick-up in the capex cycle and spending could lead to meaningful improvement in earnings, added Dhawan.

PE players believe that with investor sentiment picking up, and some companies showing strong growth, some exits could be quite rewarding for PE investors.

Coffee Day Resorts valuation, for instance, has risen from $734 million in 2010 (when PE investors like NSR and KKR invested) to over $1.1 billion currently.

Similarly, for NSE, though it has no plans to go public, its valuations have nearly doubled from R10,000 crore in 2007 to over R18,000 crore (based on IDFC's stake sale of 0.5% stake to Wolfensohn Capital Partners for R90 crore last year).

Similarly, CX Partners-backed Thyrocare Technologies and Ratnakar Bank, backed by firms like International Finance Corp, CDC Group of Britain, Norwest Venture Partners, Gaja Capital, Beacon Private Equity, Samara Capital, IDFC Private Equity and Aditya Birla Private Equity, are also exploring an IPO route.

Dhawan believes that not every investor would be able to make money though. "Returns may still be a challenge for investments of 2007 vintage. The sharp currency movements will also influence returns," he said.

Sanjeev Krishan, executive director & leader, private equity & transaction services at PwC India, believes that as the IPO market opens up, it could provide another steady exit mechanism for PE investments.