PE majors cut down exposure to large-cap listed firms

Increase presence in similar mid-sized companies

The global private equity (PE) majors are changing their strategy a bit on their investment in the listed space. The PE majors are reducing their exposure to the large-cap listed companies, as the stock market has broadly been in the recovery mode lately. Simultaneously, they are stepping up presence in similar mid-sized companies.

Last month, PE majors Carlye and Warburg Pincus had, in two separate deals, made a partial exit from their investments in India’s leading mortgage lender HDFC Ltd and leading lender Kotak Mahindra Bank, respectively.

Vikram Utamsingh, head-private equity, KPMG India says the opportunities may be good on mid-cap companies. Reason: Valuations have not fully caught up, says Vikram Utamsingh, its head (private equity). “Like, they are getting higher with the large cap companies. So the PE firms see opportunities in these companies,” he told Business Standard.

In the recent past, the private banking space has witnessed frequent private equity deals. Apart from exits of Warburg Pincus and Carlyle, the Singapore government-owned Temasek sold 1.4 per cent stake in ICICI Bank for Rs 1,500 crore. ICICI Bank has a market cap of more than Rs 1 lakh-crore.

This month, General Atlantic has increased its stake in Hindujas-promoted IndusInd Bank by acquiring another 1.4 per cent stake from the open market for about Rs 150 crore. Currently, General Atlantic, which held 1.31 per cent in IndusInd as of March last year, holds 4.85 per cent in the bank. IndusInd Bank has a market capital of Rs 14,000 crore.

For example, Carlyle which raised about Rs 1350 crore by selling about 1.3 per cent stake in HDFC, reduced its four-year-old investment and the stake was reduced to below four per cent stake. On the other hand, Carlyle keeps stepping up its presence in India Infoline. Carlyle increased its stake in India Infoline (IIFL) to nine per cent from 6.7 per cent through an open market deal, with an investment of about Rs 200 crore for the stake. Similarly, Carlye also bought 3.85 per cent in Edelweiss Financial Services from the open market for Rs 86 crore.

HDFC has a market cap of Rs 99,498 crore against IIFL’s market cap of Rs 2,129 crore.

In another block deal, PE major Warburg Pincus sold about 2.3 per cent in Kotak Mahindra Bank through open market deal to raise about Rs 850 crore. Kotak Mahindra Bank has a market capital of Rs 40,745 crore.

According to experts, the facts of higher percentage of stake as well as prominent place in the board drive more PE firms into the mid-sized listed companies. PE fund managers did not respond to BS queries.

Sri Rajan, head (private equity practice), Bain & Co India, says PE firms, in general, would like to invest in companies where they can get a higher stake. “For, they believe they can have more influence over the company. That is what their LPs are looking for. I am therefore not surprised to see the activity in the mid-market.”

After its recent deal with IIFL, Sunil Kaul, senior director with Carlyle Group, joined the IIFL board as a non-executive director. Similarly, Blackstone got two board seats in newspaper publisher Jagran Prakashan Ltd after Blackstone had completed a Rs 225-crore investment in the promoters’ privately held holding company, Jagran Media Network Investment Pvt Ltd, by acquiring 12 per cent stake last year.

In December, Warburg Pincus had also sold half of its holding in its seven-year-old investment in the diversified company Max India for Rs 308 crore. Warburg Pincus, which held 12 per cent stake in Max India as of September 30, 2011, sold half of its stake through various open market deals.