Impact funds make good returns in Equitas IPO

10 investors exit with returns ranging from over two to 13 times

At a time when investors are struggling to find a good exit route, Equitas Holdings, the parent company of India’s fifth largest microlender Equitas, has given good returns, especially to social funds, through its initial public offering (IPO). The recent IPO of the Chennai-based company saw 10 investors exit with returns ranging from two to 13 times.

Venture Intelligence, which tracks private equity transactions, termed the returns for the three social investment funds — Aavishkaar, India Financial Inclusion Fund and Lok Capital — as “excellent”.

Aavishkaar Goodwell exited with over 13 times returns for an investment of  $1.5-million it made in March 2008, according to Venture Intelligence data. The fund was one of the earliest investors in Equitas, valued at Rs 30 crore then. While India Financial Inclusion Fund saw its investment multiply 4.5 times, Lok Capital gained over two-fold.

Multilateral institutions — International Finance Corporation and Netherlands Development Finance Company (FMO), which partially focus on social investments — too made good returns.

However, for pure financial investors like private equities and venture capitalists, it was not satisfying, especially when compared with the returns they get from sectors such information technology.

An analyst said, “The internal rate of return, which they have got, is very close to the expectation.” Helion Ventures exited with three times and Aquarius made more than double its investment. CLSA Capital and Sequoia Capital India exited with  2.3 times. Creation Investments made the smallest gain of 1.6 times.

Siddharth Purohit, analyst at Angel Broking, said considering the current environment, this was a fair valuation. On SKS Microfinance, which went public in 2010, fetching investors higher returns, Purohit said the two could not be compared as the environments were different when they had listed.

“There was lots of optimism and the industry was doing well when SKS’ IPO had hit the market. The regulations have changed. The market is different, especially after the Andhra Pradesh MFI crisis. Besides, Equitas’ return on assets and return on equity is comparatively low and it would take a few years to improve as the company is now converting itself to a small finance bank. All these are challenges for company’s profitability,” he said.

However, the long-term outlook for the company remained optimistic, he added. Sequoia Capital India enjoyed higher returns in SKS as it was an early investor (round 2), but in Equitas its first investment was in the fifth round.