The stock market meltdown has eroded returns on most private investment in public equity (PIPE) deals done last year. Out of the 63 deals, the mark-to-market return is positive for only three deals, with the rest in negative. The current mark-to-market value of the $5.29-billion PIPE investments is just $2.55 billion, or 51.65% less.
Data compiled by Nexgen Capitals, the investment banking arm of Delhi brokerage SMC Global Securities, shows 95% PIPE deals of 2007 are showing negative returns because of the high entry valuations and declining stock market.
Sensex is down by 53% from January 1 this year and the stocks of most companies, in which these PIPE deals are done, are trading 40 to 70% below their January peak.
Wealth destruction has happened in all sectors and the hardest hit are manufacturing, IT & ITeS and real estate, which saw a spate of private equity (PE) deals last year. The value of PIPE deals in manufacturing is down by minus 75.42%, followed by IT&ITeS at minus 71.75%. In comparison to these two sectors, the BFSI and telecom sector showed a marginal drop of minus 34.59% and 21.79%, respectively.
PIPE deals are money put by private equity firms into companies that are listed on the stock exchanges. These deals had become popular with Indian companies after the stock market boom.
Now, the global slowdown and liquidity crunch have crimped PE investment in Indian companies. Data compiled by Grant Thornton show that in the first ten months of this year, there were 274 deals with an announced value of $9.67 billion, as against 328 deals worth $13.43 billion in the corresponding period last year. For the entire year of 2007, there were 405 deals worth $19.03 billion, out of which PIPE deals accounted for 30% of the value.
The traditional route for private equity firms is to buy a controlling stake in a company that needs capital to scale up its operations. They look for promising companies in industries ranging from information technology to real estate and give a boost to the company by doing everything from injecting more capital for expansion to hand-holding the management and providing strategic guidance.
Analysts say PE firms are also mulling premature exit from companies that couldn?t mobilise funds through IPOs, and are putting pressure on the promoters to buy out their holdings. Companies usually raise funds from PE firms, who get a guaranteed return, and shares at a discounted price during the IPO. With the IPO market in the dumps, PE firms are getting reluctant to risk their investments.