Pre-IPO deals get PE investors best returns

Written by Markets Bureau | Mumbai, Jun 4 | Updated: Jun 5 2008, 05:34am hrs
While the foreign institutional investors might be miffed with the Indian equity market and be steadily decreasing their exposure, private equity players might not, as returns earned by deals remain in the positive zone. Incidentally, private equity investors took a record $19.5 billion exposure in India, significantly higher than the $12.8 billion in China.

In this segment, the pre-IPO marker seems to have been the stellar area where investments made in 2007, and marked to market till end of May, have seen the deals generate a 128.30% return, says a study conducted by New Delhi based SMC Investment Solutions & Services.

Earlier known as the venture capital, pre-IPO route is where private equity funds invest in the company way before the IPO and then earn the gains by exiting after listing or in the secondary market at an opportune time.

In 2007, there were around 15 pre-IPO deals, of which, 10 have registered gains as of May end and 5 are in the red. PE funds like ICICI Venture, T Rowe Price, 3i, IDFC and GIC have gained from investing in the Mundra Port SEZ IPO. Initial investments worth $208.9 million are now worth $701.50, says the report.

However, the pre-IPO segment remains the smallest of avenues preferred by PE players accounting for around $500 million investments in 2007. It is the IPO market, which saw maximum investments in 2007 - pegged at around $8.31 billion. And this segment saw average returns being around 22.14%, and around 43% of the 106 deals have clogged positive returns, says the SMC Investments report. Here, PowerGrid and Mundra Port remain the strong performances and investments in real estate majors, Purvankara and Omaxe, have pulled the returns down.

But the private investment in public equity or PIPE route, the worst performer, where investors can chose to participate in the qualified investor's route and also through the secondary market, saw average returns of around 8.34%. Here, "About 58% of the PIPE deals of 2007 are in negative territory, owing to high entry valuations and volatile capital market conditions," says the report. The manufacturing sector PIPE investments were the worst hit as 14 of the 17 deals registered losses.

Going ahead, the head of a large PE fund reckons that the pre-IPO route is likely to get more prominence as a lot of trading activity carried out by PE funds in 2007 is slated to reduce. Funds usually tend to participate in the extra upside expected in the market by taking trading positions. Since the Indian market was on the upswing, PE funds too increased trading positions. And even when the IPO market is down, the number of deals are expected to rise as there are strong opportunities in India for funds with patience and now valuations are expected to be more realistic.