Private equity (PE) and venture capital (VC) players have found it harder to exit investments via the stock markets this year given the poor investor sentiment. Between January and August last year, sales worth $3.4 billion were made by these investors, some of it via the IPO route, according to an analysis by EY of data from VCC Edge. However, this year, just about a fourth of the total value of exits or $1.9 billion has been realised in the markets.
The market volatility seems to have affected exits through initial public offerings (IPOs) as well, with the share having come down slightly to 8% between January and August 2018, compared with 9% during the comparable period of the previous year.
Among those players that have been able to sell shares include Blackstone, which offloaded a stake in Mphasis. Blackstone sold its 8% stake in the company through its unit Marble II Pte for about `1,500 crore. Another major open market sale was made by KKR, which, through KKR Mauritius PE Investments II, sold a 5.9% stake in Coffee Day Enterprises for `405 crore.
Compared to a Sensex return of 13.5% between January and August 2018, the index in the comparable period last year had recorded a return of 19.2%. The surging market had led to a rise in share of open market exits — the share of these transactions as a percentage of overall exits stood at 39%. An open market exit is one where a private equity unloads its stake via equity markets, mostly through a bulk or a block deal.
In terms of value, these exits amounted to $2.788 billion — more than twice that was seen between January and August 2018.
Some of the main IPO exits this year include Tata Opportunities Fund’s stake sale in Varroc Engineering and Micro Ventures’ stake sale in Grameen Financial Services.
Vivek Soni, partner and national leader, private equity services at EY India, pointed out that given the volatility in the stock markets, deal activity through open market operations is expected to remain muted for some time.
“Also, though IPOs continue to be an important exit route for the PE/VC community, and have done well so far, there could be delays in IPOs of some PE-backed companies as market conditions are not ideal due to high levels of volatility in the mid-cap/small-cap space. Nonetheless, secondary sales should continue to see traction as new investors lap up businesses that have proven their growth potential and scaled up well under early investors,” Soni observed.
Mid-cap and small cap stocks have been been battered in 2018. The Nifty MidCap Index has given up more than 15.2% since the start of the year while the Nifty Smallcap index has lost 26.9%.
Raja Lahiri, partner at Grant Thornton India, argues that PE-backed companies with strong fundamentals and operating in growth-oriented sectors have already witnessed successful IPOs and this mode remains one of the top exit options for PE investors.
“In my view, there is enough traction for PE-backed companies who are lining up for the IPO market, which should provide good opportunities for exits. Of course, there is volatility in the markets and IPO pricing and timing are something difficult to forecast and will continue to remain market dependent,” Lahiri said.