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| Secondary sales find fervour with PE players |
| Press Trust of India / New Delhi Apr 07, 2009, 15:11 IST |
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Global economic downturn has given rise to a new trend in the private equity scene, secondaries, wherein partners in a PE fund are preferring to liquidate their position to another party to meet redemption pressures.
"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 position to meet prior commitments," Venture Intelligence CEO Arun Natarajan said.
Known as 'Secondary deals' in Private Equity parlance, 'secondaries' refer to a Limited Partner (LP) or the part owner of the fund selling its stake in the fund to another partner or a third party to seek an exit option.
Echoing similar view KPMG PE Advisory Group Head Vikram Uttamsingh said: "PE industry will see a lot less deals in 2009. Secondary sales will increase as some PE firms and LPs will feel global pressure to exit their India investment".
Analysts believe that with the fall in PE valuations, the partners are now exiting the funds at much cheaper prices.
"Some limited partners are now exiting even at lower valuations as they are on the verge of bankruptcy. They are resorting to desperate sale as they are facing trouble back home," SMC Capitals Equity Head Jagannadham Thunuguntla said.
As per Venture Intelligence, in 2008, there were seven secondaries in India, including ICICI Venture's stake sale in Subhiksha to Premji Invest for USD 56 million.
"With increasing number of partners planning to divest their stake, decision making by the new partner has become fast as those who are investing in the fund are mainly divesting their portfolios," Natarajan added.
Analysts feel secondaries can 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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