Secondary sales, or sponsor-to-sponsor transactions, are likely to remain the preferred route for private equity exits in 2014. A host of PE investors are waiting to exit, having stayed invested for six or seven years, even as others look for opportunities to invest.
A Bain & Company 2014 report says that sponsor-to-sponsor deals will likely see an uptick in markets like India and China. Such sales in India reached a record high of $2.3 billion in 2013 ? a 50% increase over 2012.
Equity markets and corporate M&A activity were subdued in 2013, making sponsor-to-sponsor exchanges between PE funds the liveliest exit option. Buyers like sponsor-to-sponsor transactions as they enable prospective acquirers to dispense with much of the due-diligence risk that burdens Indian primary deals, adds the report.
JM Trivedi, partner and head – South Asia, Actis, says that one of the biggest issues in India is that the industry has not been able deliver adequate capital back to the LPs (investors).
“Most PE deals in India are minority growth capital transactions. Given the preferred route of exit for such deals is IPO, and the IPO market has been shut for the last 2-3 years, we are seeing more and more sponsor-to-sponsor transactions. Till the IPO market revives, this will remain one of the major exit routes for PE Funds,” said Trivedi.
Sumit Tayal, director at Helix Investments Advisors, too, believes that secondary transactions between private equity players would continue to remain an active exit route.
“It?s not just the older investments, secondary transactions are happening for shorter duration investments as well. Earlier very few funds were open to do such transactions, but that is not the case any more,” said Tayal, who heads India focused $100-million fund sponsored by the Culbro, LLC and Bloomingdale Properties in the US.
As per the Bain report, India reported about 30% rise in the number of PE exits in 2013, but the total value of exits was flat, down 1% from 2012.
While the number of exits may have increased in 2013, there is considerable pressure on general partners to exit so as to return the capital to limited partners. The holding period for PE investors has been getting longer due to the challenging PE exit environment in India on account of lower returns, sharp currency depreciation and a subdued primary capital market. But as the majority of investments made in the boom years of 2005-07 are now approaching maturity, experts believe the looming PE exit crisis will result in more such secondary sale deals.
Avalon Consulting, a management consulting firm, believes that nearly R85,000 crore of 6-7-years-plus invested capital waiting to exit will be characterised by slower exits yielding lower returns (nearly 15% internal rate of return) mainly through secondary sales and buybacks. Similarly, the Bain report for 2013 also highlighted that about $38 billion of the capital deployed in 2006-08 will be approaching exit within the next 1-3 years.
“The PE-to-PE transactions depend mostly on the fund’s preferred stage of investment, and so the trend of VCs who provide start-up capital selling part of their stake to later stage PE investors would continue to gain ground which is a good thing,? said a VP ? at an investment firm with global AUM of over $3500 million ? unwilling to be quoted.
“However, the exit decision for a PE firm would depend on the kind of investments made an, so, if in a whole portfolio I find opportunities to monetise investments made in 2009 with good returns, there’s no pressure to sell investments made in 2007 first,” he added.
PE major Bain & Company believes another reason for increased sponsor-to-sponsor transactions is the absence of good opportunities for new PE funds. “With emerging market PE funds sitting on large piles of dry powder they are eager to put to work, buying assets from other PE funds is becoming both attractive and necessary,” said the report.