US private equity firms Carlyle Group and Warburg Pincus took advantage of recent market gains to pare stakes in two financial companies in deals worth $440 million, a sign of investor wariness about the sustainability of the rally.
Buyout firms that invested billions of dollars during the market's boom years before the global financial crisis are widely expected to look for opportunities to cash in their holdings, with more stake sales anticipated in coming months.
"We will definitely see more and more exits, perhaps most of the investments that are more than three years old, if the stock market rally continues," said Vikram Utamsingh, head of private equity advisory at KPMG in India.
Carlyle, which owned about 5.2 per cent of mortgage lender HDFC, making it the No. 2 shareholder after Citigroup with 8.8 per cent, sold about 20 million shares at an average price of Rs 677.25 apiece, exchange data showed. The deal was executed at about 3.3 per cent discount to the scrip’s close of Rs 698 on Tuesday. The private equity firm raised about $270 million, nearly doubling money from a 2007 investment. Deutsche Bank was the sole manager of the block deal, sources said.
In another block deal, PE major Warburg Pincus sold about 17.5 million shares in Kotak Mahindra Bank through an open market deal to raise about $170 million. Warburg Pincus sold 2.37 per cent of the bank's outstanding equity through two separate block deals. Melany Holdings and Madison Holding — affiliates of Warburg Pincus, sold 87.5 lakh shares each of Kotak Mahindra Bank at an average price of Rs 490 per share on the National Stock Exchange.
Blackrock, Deutsche Securities, ICICI Prudential AMC, SBI Life and Vontobel Funds were the buyers. Vontobel was the biggest buyer as it picked up 11.7 million shares, followed by Deutsche Securities, which bought 2.6 million shares, according to the exchange data.
The two share sales came after the BSE Sensex jumped 11 per cent in January, its first rise in three months, and the strongest month since September 2010. It was the best January for the index since a 19 per cent rise in 1994, and the rally was mainly led by financial stocks.
India's stock market dropped nearly 25 per cent in 2011, making it one of the worst global performers and leaving few options for private equity firms to exit from their portfolio companies through IPOs or block deals.
Singapore sovereign funds Temasek Holdings and Government of Singapore Investment Corp (GIC) are looking to sell part or all of their holdings in ICICI Bank.
Temasek owned 3.5 per cent of ICICI Bank at the end of September, according to Thomson Reuters data, a stake now worth roughly Rs 3,600 crore. GIC held a 1.8 per cent stake in the bank.
One large investor, or limited partner, in private equity funds, said returns in India have been disappointing.
"Last year was a complete washout year in terms of exits. Now GPs (general partners) are under pressure as they have to show returns of earlier investments," said the investor, who declined to be identified.
Private equity exits through Indian IPOs dropped 66 per cent last year to $85 million in 15 deals, according to data from industry tracker VCCircle.com.
KPMG expects that roughly $95 billion in Indian private equity investments made during the bull market years of 2006 to 2008 will come up for sale over the next three years.
Elsewhere in Asia, investment banks are counting on sales of large blocks of stock by institutional owners to bolster dwindling underwriting fees and spark the region's equity capital markets back to life.
Investment banks love block trades because they pay fees similar to IPOs but usually require less time and work.
"There's lots and lots of interest in sponsor selldowns and blocks. There's a lot of activity there and where we will focus most of our time," said an investment banker at a top global institution in Hong Kong.
The Washington-based Carlyle will retain nearly four per cent of HDFC after the deal. The sale is the first from India by Carlyle Asia Partners, a buyout fund, a source said.
In June 2011, Citigroup sold a 1.5 per cent holding in HDFC. That sale was done ahead of the adoption of a global accord on banking that discourages large holdings by banks in other financial institutions.
There has been a high level of focus on financial and capital markets with a slew of measures