PEs prefer strategic sale over initial public offers

Despite a vibrant primary market, private equity (PE) players are choosing secondary markets and strategic sales to exit investments. Earlier, initial public offers (IPO) used to be the most popular exit option globally.

Strategic sale includes sale to investors (including financial investors) and joint venture partners. According to Venture Intelligence data for January-April, PE firms exited 47 companies, of which 39 exits were through mergers & acquisitions (M&A) and eight through IPOs. There were 17 exits through M&As in the corresponding period last year. In January-April last year, exits through IPOs were limited due to a lull in the primary market.

Experts say since the markets have revived, PE players who entered in 2003-04 will be looking at exiting through different routes, including strategic sales and IPOs.

“We have seen an increasing interest among investors in selling during IPOs. This was not a favourable option earlier. The type of exit also depends on when the investment has happened. If it was in 2004-05, investors would like to explore public markets to exit,” said Arun Natarajan, chief executive & MD, Venture Intelligence.

Experts also point out that the IPO process takes three to six months whereas a strategic sale is immediate. Besides, if the markets are north-bound, a strategic sale can ensure higher valuations. This is because a strategic sale gives investors an option to negotiate while valuations in IPOs are fixed.

“Strategic deals are at a premium. This is going to be the most preferred route of exit this financial year. Investors in six out of every 10 deals are exploring the strategic route to exit,” said Vikram Hosangady executive director, KPMG.

Experts say having a PE player as an investor makes an IPO attractive. But if a PE player chooses not to exit during the IPO, its investment is locked in for a year after the company goes public. But keeping in mind the way the market has moved in the last one year, PEs are not in a mood to wait for long. There is also the pressure from limited partners to liquidate.