Many private investment in public equity (PIPE) deals, which suffered a setback against the backdrop of uncertain secondary markets, may remain in the pipeline for more time. Experts see a further slowdown in PIPE deals until the primary and the secondary markets return to normal.
Since the stock market meltdown that started in mid-January, many deals have reportedly been called off on valuation disagreements between the target company and the private equity (PE) player. The bull run last year had pushed the stock prices of many of these companies to stratospheric levels, but in the meltdown their prices have slipped by more than 50%. This has prompted promoters to withdraw from such PE deals, fearing less attractive valuations for their companies.
Harish HV, partner, specialist advisory services, Grant Thornton, reckons: ?We would expect some slowdown in the first quarter of 2008 as companies adjust to new realities of valuations, away from the dizzying heights up to December. Once that is settled and the market stabilises, we would expect to see many more PIPE deals happening, as the secondary and IPO markets may take more time to recover and PE funds are flushed with capital.?
Also, following the market carnage, PE players have seen steep value erosion of their deals made in the preceding two years.
For example, the stake of Citigroup in Akruti City has ended with a huge notional loss, as the share price of the company is down by more than 24%. The same is the case with JP Morgan?s stake in Ballarpur Industries; the share price has plunged by more than 80%.
Following the market collapse, PE players opting to exit via IPOs are also waiting for the IPO market to stabilise. ?PE players who propose to exit through the IPO route will necessarily have to wait for a while till the markets stabilise and the IPO market starts functioning properly,? adds Harish.
The year 2007 was remarkable for private equity funding in India. According to a study by Grant Thornton, the number of PE deals which stood at 302 in 2006 at a value of $7.9 billion rose to 405 deals in 2007 at a value of $19.03 billion. Not only that, the average PE investment ticket size increased by more than 80% from $26.02 million in 2006 to $47 million in 2007.