PEs stuck with brokerage deals struck in boom time

Low valuations force them to sit tight as exits are hard to come by

Private equity (PE) funds, which invested in brokerage companies during the previous bullrun, find the value of their investments has eroded significantly. In one instance, the value has dipped 90 per cent from the original investment.

In 2007, there were 14 deals in the broking space for a total investment of $661.7 million, according to VCCEdge, the financial research platform of VCCircle.com. This was the highest yearly investment in brokerages by private equity or venture capital firms, according to VCCEdge data stretching back to 2005.

With valuations so low, PE funds find it tough to exit, forcing them to sit on their losses till an opportunity strikes, sources said.

“Even if they want to take the exit route, and hand over stakes to someone else, the valuations will be bad because the of the tough market conditions,” said a senior official with a PE-backed brokerage on condition of anonymity.

According the executive director of another brokerage, sentiment is near an all-time low. “Chances are that they will hold on for another two years. People are waiting for better times.”

Many brokerages have a right of first refusal (ROFR) - the right to buy stake before it is offered to anyone else. However, valuations and other concerns have slowed deal-making.

“There has been no request on an exit recently under ROFR. They seem to be holding on for now,” said one of the two people quoted above.

Brokerages with PE stakes include Sharekhan, Anand Rathi Securities, JRG Securities, Prabhudas Lilladher, Angel Broking, and Karvy Stock Broking. The investors of the time included marquee names such as Citi, Baring and ICICI Venture.

Valuations of broking companies have been on a steady decline on account of falling revenues. Some such as JRG Securities have fallen from a high of over Rs 100 per share to an all-time low of less than Rs 7, a fall of over 90 per cent.

According to Vikram Hosangady, head (transaction services) at KPMG India, it is difficult for broking entities to attract fresh investment, a necessity if PE funds are to offload their own stakes. “The broking sector is obviously the most impacted by the volatility in the capital markets. Significant competition that has resulted in low fees and hence unsustainable margins have resulted in a sharp decline in revenues and hence made it a less attractive investment opportunity.”

He added that mergers and acquisitions in the space would help. “We should see consolidation (rationale being geography, niche, type of clients, etc) in the broking industry if we are to see sustainable business models.”