Feel-good factor opens exit route for PEs in India

An upbeat market, a stable government at Centre and opportunities to raise second or third funds are cited as reasons for boom in momentum

 

Private equity (PE) investors, who have been struggling to make exits from their investments, have finally found a way out in India’s booming stock markets. With the Sensex touching 25,000, a lot of PE investors are on exit mode. The figures of the past couple of months show that exits have gained momentum.

Besides an upbeat market, the current flow of exits also is attributed to reasons such as the formation of a stable government at the Centre and the opportunity to raise second or third funds.

Ravi Shankar, managing director and India head at boutique bank Avista Houlihan Lokey, said: “Indian PE funds had found it a challenge to return capital to limited partners (LPs) in the past, which impacted their ability to attract new capital for India. Of the $80 billion invested in Indian markets till 2013, only $30 billion has been returned to LPs. The recent rally in the stock markets has given an opportunity for some of that backlog to get cleared and sponsors are taking advantage of that.”

Bain Capital, which encashed the 'feel-good' factor by selling one third of its stake in Hero MotoCorp for about Rs 1,500 crore, has made a 2x return on its two-year-old investment. In the unlisted space, another PE major ChrysCapital, which invested a mere $10 million (Rs 50 crore) for a 12 per cent stake in Intas Pharmaceuticals, sold about 11 per cent stake from its 10-year old investment for $160 million (Rs 960 crore) to Temasek early this month.

Sanjiv Kaul, managing director of ChrysCapital, said: “Market sentiments have turned positive with the perception of a strong and stable government under Narendra Modi's leadership, coupled with an action-oriented bureaucracy. Also, now is a good time for fund-raising and, hence, the need to monetise assets that can generate liquidity to the investors.”

According to data, the size of PE exits grew about 750 per cent in May at $365 million compared to $43 million in April 2014. So far in June, exits worth $293 million have been taken place. Similar to last year, open market transactions remain as the top priority for PE exits in 2014. According to data from VCCEdge, 33 open-market deals worth $580 million took place in 2014 against 26 mergers and acquisitions (M&A) worth $478 million and two initial public offers (IPO) worth $46 million.

Last year, 63 open market transactions worth $1.7 billion took place against 46 M&As worth $617 million and one IPO worth $175 million.

Vikram Hosangady, head of private equity at KPMG India, said: “Most of the recent exits have been from listed companies. This is due to a sharp increase in the benchmark indices fuelled by the rise in foreign and domestic investment. Exits, which were overdue from a timing perspective, will become a priority both in listed and unlisted situations."

Early 2014 has seen the largest M&A deal in Indian dairy space where global major Carlyle made 3x return from its four-year-old investment in Tirumala Milk Products. In January, Lactalis acquired a 100 per cent stake in Tirumala Milk, where Carlyle Group was holding a 25 per cent stake. Carlyle's Growth Fund had invested $22 million in the company in 2010 and it reportedly received $70 million in return for its investment.

“PE funds operating in India have realised that investors will no longer buy the India story without seeing profitable exits,” said Kaul of ChrysCapital.