Choppy markets increase pe secondary sales

Helped by foreign funds’ eagerness to invest in India.

Private equity (PE) investors have become friendly to their rival firms. With stock markets remaining choppy, there has been a rise in secondary sales as more and more PE firms sell their investments to other PE firms.

According to Chennai-based Venture Intelligence, which tracks such deals, there have been five such exits worth $225 million in the first six months of the year. This is higher than the last year’s figure of six exits worth a total of $80 million and eight such transactions worth $192 million in the year before that.

“Until 2007, a lot of exits used to be focused around capital markets and so you did block sales after a company did an IPO (initial public offer) and got out,” said Sanjay Bhandarkar, managing director, Rothschild, a global investment bank which also provides PE advisory services. “Now, you see a lot more exits through secondary sales. You will see this continuing.”

The most recent was in June, when ICICI Venture sold its stake in Metropolis Health Service to Warburg Pincus for $85 million. The trend has been helped by the increased interest of foreign funds in India businesses.

“We thought we would go for an IPO to give ICICI Venture an exit option, but market conditions did not support us,” said Sushil Shah, chairman, Metropolis Health. The company and the PE investor chose the secondary sale route. Over 30 funds queued up to buy the stake from ICICI Venture. “As developed markets still have a subdued outlook, there is an increased interest among foreign funds to invest in India. This makes secondary sales much easier at the moment,” said Shah.

Other secondary sales this year included Everstone selling stake in Lilliput Kidswear to Bain Capital and TPG Growth. Temasek and Kotak PE sold their stakes in INX Media to New Silk Route. Carlyle sold its stake in Financial Software & Systems to New Enterprise Associate and New York Life Investment Management India. And, IL&FS Investment Managers sold its stake in IL&FS Education and Technology Services to India Equity Partners.

Another reason the trend is catching on is that there has been slow progress in many companies’ plans in the past two years due to the ongoing economic slowdown. Export-based manufacturing companies have been especially hit. This has resulted in companies not reaching the desirable scale to hit the capital markets.

On the other hand, PE players have definite investment periods. After this, they need to make an exit and give a return to limited partners, from whom money is sourced.

“Early investments made by PE firms in 2004-05 are coming to an end and no one has the guts to go to the public markets,” said Jacob Mathew, managing director of Mumbai-based MAPE Advisory Group, which is working on such transactions.