PE majors ride on consumer and finance segments

Sizeable open market exits in Jan-June record returns of 2-6 times

At a time when global private equity (PE) investors are struggling to exit their investments in India, consumer segments, as well as finance, remain attractive, providing multiple returns. The January-June period saw major exits in the open market such as the Apax-Apollo Hospitals deal, Warburg Pincus-Havells and TPG-Shriram Transport; these provided returns of two-six times on investments.

Till June, 68 PE/venture capital (VC) exits worth $1.6 billion were recorded, and open market exits took the lead with 24 exits, worth $1.2 billion. Sanjeev Krishan, leader, PE, PricewaterhouseCoopers, said, "Most of the large exits were made through public markets, which have been fairly buoyant through the last six to eight months. It is also pertinent to note in all cases, the promoters are of a high pedigree, with a very consistent track record, a key determinant for PE investors today."

February and May, when part- exits by Apax, TPG and Warburg were recorded, saw total exits worth $838 million and $459 million, respectively, while March and April saw exits worth a mere $21 million and $25 million, respectively.

In the largest open market exit this year, Apax Partners had offloaded its entire 19 per cent stake in Apollo Hospitals for Rs 2,240 crore in two tranches in February and May. Apax reaped returns of about three times on its investment. In 2007, it had acquired 11 per cent stake in Apollo and later increased its stake. It has invested $170 million in Apollo so far.

Shashank Singh, managing director and head, Apax Partners India, said, "Various sectors linked to consumer segments---healthcare, financial services---in India offer significant PE opportunity, driven by under-penetration of products and services and a rapidly growing Indian middle class, with increasing aspirations."

In May, TPG Capital exited Shriram Transport, selling 10 per cent stake to Piramal Enterprises for Rs 1,652 crore ($307 million). In February, TPG had sold 9.9 per cent of its 20.28 per cent stake in the Chennai-based financing company for Rs 1,660 crore. Through these exits, TPG recorded returns of six times on its eight-year-old investment. In 2005, TPG's arm Newbridge had invested $100 million for a 49 per cent stake in Shriram Holdings (Madras).

Krishan said, "It is true consumer and consumer-related businesses such as healthcare have been the best bet for PE funds, and they continue to get premium valuations. One of the reasons has been the lack of returns from alternative segments such as capital goods and infrastructure. This means fresh investments in consumer segments continue to have higher multiples which, on the flip side, helps funds looking to exit their pre-2008 investments."

Another major deal in the consumer sector was Warburg Pincus' complete exit from electrical equipment maker Havells. Selling 8.5 per cent stake for Rs 730 crore ($130 million), Warburg recorded twice the returns on its investment. In February, Warburg had sold 5.5 per cent stake in Havells India for about Rs 455 crore. Earlier, it had paid about Rs 680 crore for a 15 per cent stake in the company.

Long-term relationships with PE funds have also helped companies grow, even in adverse times. "PE investors are also stuck with investees for a long time. TPG and Shriram have had a very long and wide association. Likewise, Warburg Pincus stuck to Havells, even when it was struggling with Sylvania. This helps build trust; it plays a very important role in a PE-investee relationship," said a PE veteran, on condition of anonymity.