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| Secondary sales find favour with PE players |
| Press Trust Of India / New Delhi Apr 09, 2009, 00:58 IST |
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The global economic downturn has given rise to a new trend in the private equity (PE) sector — secondaries, experts say.
Known as 'secondary deals' in PE parlance, 'secondaries' refer to a Limited Partner (LP) or the part owner of a PE fund selling its stake to another partner or a third party to seek an exit option.
"Going forward, we will see more secondary deals in the Indian private equity space. Now more such deals are coming to the fore as increased number of partners are looking at liquidating their positions to meet prior commitments," Venture Intelligence Chief Executive Officer Arun Natarajan said.
Echoing a similar view, KPMG PE Advisory Group Head Vikram Uttamsingh said, "The PE industry will see a lot less deals in 2009. Secondary sales will increase as some firms and LPs will feel global pressure to exit their India investment".
Analysts believe that with the fall in PE valuations, partners are now exiting funds at much cheaper prices.
"Some limited partners are now exiting at lower valuations as they are on the verge of bankruptcy. They are resorting to desperate sales as they are facing trouble back home," SMC Capitals Equity Head Jagannadham Thunuguntla said.
According to Venture Intelligence data, in 2008, there were seven secondaries in India, including ICICI Venture's stake sale in Subhiksha to Premji Invest for $56 million.
"With more partners planning to divest their stakes, decision-making by the new partner has become easy as those who are investing in the fund are mainly divesting their portfolios," Natarajan added.
Analysts feel secondaries could turn out to be a profitable option in the bull market, but the current financial meltdown is leading to partners exiting at loss, while some owners with cash reserve entering at low prices.
"PE funds invest mostly in unlisted space wherein valuations becomes difficult at the time of exit. Since the companies are now facing extremely depressed valuations, the exiting partners are doing so at losses," Thunuguntla added.
Besides, US-based research firm Preqin has said that the secondary market would continue to grow from a niche sector to a vital part of the PE industry, as increasing number of funds want to take advantage of the secondary transactions.
"Over the course of 2009, we predict that the number of secondary sales will increase, with both buyer and seller confidence being buoyed by new fund valuations," Preqin spokesperson Tim Friedman said.
Thunuguntla said, "PE partners are now realigning their portfolio to match their current requirements as more and more funds are now suffering the spill-over effects of the collapse of some of the major US banks".
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