Higher valuations quoted by companies have prompted private equity players to opt for the follow-on investments route rather than expand portfolio by expensive stake buyouts.

For instance, IDFC Private Equity, which had added another Rs 600 crore in Quippo Telecom with Oman Investment Fund last month, is aiming at another $15 million investment in Manipal Universal Learning, an educational institution.

In 2006, IDFC Private Equity, along with US investment firm Capital Group, had pumped in Rs 300 crore into Manipal Universal Learning. Quippo raised $35 million from IDFC Private Equity and Singapore?s GIC in 2007. Last month, edible oil company KS Oils received Rs 450 crore investments from a clutch of PE investors such as New Silk Route and existing investors like Citi Venture Capital International (CVCI) and Baring Private Equity Asia. CVCI and Baring Asia will subscribe to convertible warrants by investing Rs 49 crore each. Two years back, Baring Private Equity Partners and CVCI had invested about Rs 90 crore in KS Oils.

Luis Miranda, CEO, IDFC PE, told FE, ?The mounting valuations of companies keep us back from aggressively looking for more new deals. We wanted to focus more on our existing portfolio of companies which has larger potential for growth.? The new government?s stand in private sector education brings optimism for further investments in education sector, he added. However, Miranda refused to disclose about its other follow-on investments plans. The company is learnt to be keen on further investments in L&T Infrastructure Development Projects. IDFC PE manages a corpus of $1.3 billion across three funds.

According to Bhavesh A. Shah, executive director, investment banking, JM Financial, many PE investors follow the partnership model for their portfolio companies. He said, ?While each investment is an independent consideration, investing in a portfolio company is relatively easier due to familiarity and understanding of the business. This is so especially when further investments will help enhance the value of the company eventually.?

From the company?s perspective, follow-on investments make sense because they do not have to deal with a multiple set of investors. The companies may, however, decide on another investor if there is value addition which can benefit the company, he added.

Recently, IDFC PE was allotted equity shares in the listed GMR Infrastructure Ltd through swapping its shares in Delhi International Airport Pvt Ltd (DIAL).

DIAL is a subsidiary of GMR Infrastructure. According to Venture Intelligence, PE firms have invested about $888 million across 44 deals during the quarter ended June 30, 2009, which is significantly lower than the figure during the same period last year which witnessed $2,587 million invested across 92 deals.

?Follow-on investments are considered based on various factors such as tenure of the new investment and hence the exit, size of the investment and hence the total investment in the company, valuation, anti-dilution and any other right the investor may have such as option to invest further,? Bhavesh said.