The M&A momentum seems set to continue

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: October 2004: HT Media raises private equity capital from Citicorp International Finance Corporation, following an earlier investment from Henderson.

August 2005: HT Media’s IPO is oversubscribed.

May 2005: ABG Shipyard raises funds from Merlion India Fund and IL&FS VC.

August 2005: ABG Shipyard files for IPO.

Welcome to the world of pre-IPO private equity deals. As long as the IPO window in India is wide open, we can expect the pre-IPO PE financing to gather momentum. Investing in mature companies just before their IPO and exiting at a profit, either at the IPO or over a couple of years, is a nice formula indeed. As long as the party lasts. I do not have too much of a problem with this phenomenon.

Over the last 18 months, one of the most significant trends in the private equity world has been the emergence of a clear stratification within the industry—i.e., who specialises in what, in terms of stage and size of financing. This is good since it lends depth to the market and can be expected to have a ‘trickle-down’ effect on start-up financing as well.

Angel investors and early-stage venture capital firms (which are a sub-set of private equity firms) can now invest in the confidence that their investee companies have multiple players to go to for follow-on financing at various stages of their growth. Until 2004, the main stumbling block for PE firms—with the exception of ‘old India hands’ like Warburg Pincus, Carlyle Group and Actis—to make serious investments in India was the lack of suitable exit opportunities.

In 2004, we tracked PE firms exiting their investments in six Indian companies via IPOs. The biggest PE-backed IPOs of 2004 were that of IT services company Patni Computer Systems and biotechnology firm Biocon. Other venture-backed IPOs during the year included that of enterprise software firm Four Soft, news television channel NDTV, agro-chemicals and pigment maker Meghmani Organics and stock broking firm Indiabulls. In 2005, data shows, private equity firms have already got exit routes in 10 of their investee companies via IPOs.

As word about ‘fabulous exits’ spreads, more and more overseas PE and VC firms are arriving in India with their money bags. The list includes several leading Silicon Valley VC firms, who while well known for backing early-stage technology companies in the US, are right now focusing their India investments on late-stage—and even non-tech—companies.