M&A new hot exit route for PE players as IPOs lose steam

The end of 2010 witnessed one among the largest exits in the Indian private equity sector, wherein PE majors Actis and Sequoia together made a cool $500-million profit through the sale of portfolio firm Paras Pharma. The beginning of 2011 is set to witness another big-ticket M&A deal, in which General Atlantic is to exit Patni Computers. The deal size could be around

$1 billion. These two mega deals remain strong examples of M&A being today’s preferred after exit route for PE firms in India than the conventional IPO route.

Siddharth Shah, head of corporate & securities practice at Nishith Desai Associates, said, “One needs to bear in mind that besides the high notional valuation that an IPO may create in some circumstances, the certainty of being able to exit on account of liquidity, price realisation and regulatory constraints may make a trade sale or a strategic sale or an M&A exit a more real and profitable exit. Time value of money is also paramount for PE investors, as most of them invest with a certain time-specific horizon.”

The PE/VC industry witnessed 37 exits through M&A worth $1.67 billion in 2010, including the $726-million Paras Pharma deal. According to VCCedge data, there were about 153 exits worth more than $5.9 billion till November 2010. The only exit that took place in December was the Paras Pharma sell-out to Reckitt Benckiser.

Shah adds, “More recently, while the markets have reached their highs, it appears that still there may not be enough appetite for fresh IPOs, considering how many IPOs could materialise in the last six months as against the number of DRHP filings. Some factors contributing to this could be underperformance by many of the companies post-IPO, sector biases amongst investors and the fear of an impending correction, etc. In such uncertainty, PE players may turn to more certain exits like trade sale or M&A exits, which may not always give the same valuation as an IPO but at least give a certainty in exits.”

The share price of SKS Microfinance, the only listed microfinance firm, eroded to a 52-week low of Rs 559 in the last month due to concerns over new MFI regulations brought by the Andhra government. The shares were traded at Rs 1490 at the end of September 2010.

About 15 exits took place through IPOs worth $1.64 billion in 2010. The largest IPO, backed by PE firms, was that of SKS Microfinance.

Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities Ltd, shares a different view. “As the markets are strong, PE players are taking it as an opportune time to exit some of their investments of 2006-2007,” he says.

In one of the largest buyouts by a Japanese firm in the Indian IT space, NTT Data Corporation acquired IT offshoring firm Intelligroup in a deal worth $199 million, in June 2010.

Shah concludes, “It appears with M&A gathering steam in 2010, trade sells or sell-offs would continue to be the flavour for PE exits in 2011. The Indian corporate sector will look at inorganic growth as its expansion strategy and also many family-controlled businesses supported by PE/VCs will look to sell out.”