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Open market, secondary sales top PE exit routes in 2012

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With initial public offerings (IPOs) few and far between last year, (PE) investors relied on deals in the open market (55.16 per cent, against 29.16 per cent in 2011) and secondary sales (27.50 per cent, compared with 19.34 per cent in 2011) for exits. accounted for 4.37 per cent of the exits, compared with 3.89 per cent in 2011; exits through buybacks stood at 2.46 per cent, against 10.73 per cent in 2011.

According to data, in the period between January 1 and December 28, there were 137 exits worth $4,433 million, while in 2011, 123 exits had accounted for $2,953 million.

In 2012, there were 49 open market deals worth $2,445 million, against 41 deals worth $861 million in 2011. Secondary sales saw 20 deals worth $1,219 million, while in 2011, there were 17 deals worth $571 million. Last year, there were four exits through IPOs, with a deal value of $194 million, compared with 13 worth $115 million in 2011. The buyback route saw 17 deals worth $109 million against 22 deals worth $317 million in 2011.

Merger and acquisition (M&A) exits accounted for only 10.51 per cent of the exits; in 2011, these accounted for 36.88 per cent.

Sanjeev Krishan, leader (PE), PricewaterhouseCoopers, said most exits were recorded in the first quarter. A number of PE firms said secondary sales were an appropriate investment route, especially in companies where a second round of funding was needed or where a first-round investor or a venture fund was exiting. “If somebody has good experience with a sponsor, the second fund does not mind making an investment, though their returns may not be supernormal. But they might get a good internal rate of return on investments. Maybe, they wouldn’t record a 2x or a 2.5x or a 3x, which the first investor had made, but at least the sponsor is known; he is credible and governance issues aren’t there,” Krishan said.

“Owing to the high valuations at which the investments were made in 2007 and 2008, a number of portfolio investments of PE funds are currently not ‘in the money’, and with the falling rupee (down 23 per cent), exits were becoming even less attractive,” said a recent PwC report.

“Compared to 2011, last year wasn’t a great one for exits. Clearly, an exit is also a function of the condition of the equity market, which hasn’t been great for the last couple of years,” said Vishal Tulsyan, chief executive and managing director, Motilal Oswal Private Equity.

Keshav Misra, partner, Baring Private Equity, said, “It all depends on the size of the investment, the size of the company and the state of ownership, the options the PE fund has and what the promoters want to do. If promoters also want to exit, along with PE firms, a strategic route would be better.”

With the rupee depreciation and the rise in interest rates last year, many PE firms deferred exits, as valuations weren’t good. This might make it difficult for the firms to go for the next round of funding, as limited partners would look at returns on previous investment before putting in more funds, said an expert.

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