The secondary sales, or sponsor-to-sponsor transactions, one of the preferred mode of private equity exits in the past two years, seem to have hit a roadblock in the past few months, as revival in capital markets, along with opening of the IPO window, has raised the valuation expectations of existing PE investors.
With just over a month to go, exits through secondary sales so far in 2014 stand at $279 million or 8.60% of the total exit value, which is the lowest in the past four years.
In the past three years, PE-to-PE exits constituted little over one-fifth of the total exit value, as poor IPO market environment and volatile capital markets left PE investors with few options but to engage with other PE players to offload their old investments in unlisted firms.
The resurgence in capital markets has resulted in a lot of PE players in listed firms tapping public markets for exits, even as those in unlisted firms are considering the IPO route to get better valuations.
The exits through the public market or open market sales currently stand at around $2.3 billion, with the likes of Bain Capital, Goldman Sachs and Providence Equity partners partly exiting their listed investments in Hero MotoCorp, Mahindra & Mahindra and Idea Cellular, respectively.
Udai Dhawan, MD & India head at Standard Chartered Private Equity, believes that with capital markets on a high, existing PE investors are looking at the IPO route, which to some extent has impacted the secondary sales.
“The Indian capital markets have been on an upward trajectory and there has been a strong appetite from both global and domestic public market investors. Several companies have leveraged or are looking to leverage this window of opportunity. This has also had an impact on PE-to-PE exits, as in many cases PE investors are preferring an IPO as an exit path for their portfolio company,” said Dhawan.
Darius Pandole, partner at New Silk Route Advisors, says apart from providing liquidity, IPOs as an exit option also offer better price discovery.
So far this year, while one PE player has exited through this route, six are yet to exit with firms like Ortel Communications and Monte Carlo already receiving Sebi approval even as others like Uniparts India, PNC Infratech, CL Educate and ACB India are awaiting the regulator’s nod.
The rising valuation expectations, too, have played a part in lower secondary transactions.
Pawan Singh, MD, India and south-East Asia at Bain Capital, says there have been several secondary transactions where they spent considerable time, but couldn’t close because of valuation issues. “Some of those have happened with other investors, others have not yet closed due to a mismatch between what the existing sponsor expects and what a new private equity buyer is willing to pay,” said Singh.
However, given the huge exit backlog of older investments, experts hope that going forward, we might see secondary sales reviving.
Dhawan expects PE-to-PE exits to continue to happen even in these markets in cases where there are large stakes involved or companies are smaller and not yet IPO-ready.
While PE investments in India over the past decade have been in excess of $90 billion, the exit environment had been rather weak, with PE investors taking home just about $31 billion in the past six years, according to a Bain & Co 2014 report.