Private equity shies away from Pipe deals

Having burnt their fingers in the secondary market crash of 2008-09, private equity (PE) funds are shying away from private investments in public equity (Pipe) deals.

From January to July this year, PEs announced 24 such deals worth $349 million (around Rs 1,703 crore), down 68 per cent from 68 deals worth $1.58 billion (around Rs 7,700 crore) in the corresponding period last year, said a study by Venture Intelligence. Pipe deals comprised 12 per cent of the total PE transactions worth $2.89 billion in the period.

The reason for the trend is that PE funds are averse to taking mark-to-market (MTM) losses. “PEs are staying away from Pipe deals due to the MTM issue. PEs invest for a time-frame of four-six years. Since the market is uncertain, one would not like to take risk,” said Vishal Tulsyan, chief executive officer of Motilal Oswal.

For instance, in 2008, the value of Pipe investments worth $1.67 billion eroded to $1.22 billion, an absolute loss of $0.45 billion (26.85 per cent), said an SMC Capital report.

“PEs are still cautious about venturing into Pipe deals, especially those who had invested in equity markets in 2007 and 2008. This despite the fact that the markets have bounced back a bit. But with the market being so volatile, PEs face the pressure of MTM losses on a day-to-day basis,” said SMC Capital Chief Executive Officer Jagannatham Thunuguntla.

PE players are also saying that the valuations have gone up by 30-40 per cent in the last six-nine months. “Pipe deals are not cheap anymore. The capital market makes sense for people who are looking at quick appreciation. The market has been range-bound and very volatile,” said Axis Private Equity CEO Alok Gupta.

However, a few venture capitalists and PE funds are attempting to re-enter the Pipe segment. The latest is Sequoia Capital India, which bought 6 per cent stake in knowledge process outsourcing firm eClerx Services, listed on the Bombay Stock Exchange, from Burwood Ventures for Rs 40 crore.

Sequoia is not alone. Norwest Venture Partners India invested in two publicly invested firms. It bought 8 per cent in Shriram City Union Finance for Rs 120 crore and 5 per cent in Onmobile, which provides mobile value-added service applications.

Sohil Chand, managing director of Norwest Ventures Partners India, said, “PE investments in Pipe deals are a function of the market and the market is buoyant at the moment. Since PEs are long-term investors, they will not like to invest through qualified institutional placements.”