PE-backed IPOs hit rough market weather

Many have postponed their plan, despite regulatory approval, underlining need for investing with a long-term view.

Tough market conditions have made it difficult for private equity (PE) investors to make quick profits by exiting from Initial Public Offering-bound companies.

Since 2010, of the 12 companies which received pre-IPO investments from PE investors, only four have managed to hit the markets so far. A majority of the funds that do pre-IPO investments keep a time span of six to 12 months for the portfolio companies to get listed.

The PE money is stuck following the inability of firms backed by them to come out with IPOs, despite getting the necessary approval from the Securities and Exchange Board of India (Sebi) for the past many months.
  

STATUS REPORT
Company	Investor	Value  ($ mn)	IPO status  (DRHP)
Super Religare Labs	Sabre Capital, Avigo	33.78	Withdrawn
Avantha Power	KKR	48.67	Approved
Micromax	Sandstone Capital,  Madison India, Sequoia	43.52	Approved
Yatra Online	Intel Capital, Norwest	44.5	Not filed
Tree House	Matrix Partners,  Omidyar Network	4.26	Not  approved
Source: VCCedge

Avantha Power & Infrastructure, which received about $50 million from KKR, got Sebi approval in August 2010 for launching its IPO. One97 Communications, backed by IDFC Investment Advisors and Reliance Capital, got Sebi’s nod in October 2010. Sequoia Capital-backed Micromax Informatics got approval in January and IFCI Venture Capital-backed Marck Biosciences got the approval in February.

Tree House Education, backed by a group led by Matrix Partners, has filed draft prospectus for its IPO with Sebi in February.Yatra Online, where a group including Intel Capital and Norwest Ventures invested about $45 million, have not even filed their draft prospectus with the regulator. Super Religare Laboratories, where Avigo Capital invested about Rs 100 crore, has withdrawn its draft prospectus and is planning to file a new one in next 4-6 weeks with revised shareholding pattern.

“PE investors should always explore other exit opportunities apart from the IPO. If they see IPO as the only exit route while making pre-IPO investments, they may find themselves in trouble. PE investors will need to have three to five years of patience,” said Achal Ghai, founder & managing partner, Avigo Capital. “The companies should avoid getting listed in adverse conditions and wait for the right time.”

According to Ghai, Avigo’s investment in SRL is not a mere pre-IPO deal, but has a long-term view.

However, the figures show that pre-IPO deals retain their attraction, though listing is not happening much. According to VCCedge data, till date in 2011, six pre-IPO private equity deals worth $117 million took place against eight worth $125.5 mn in 2010.

The performance of a few recently floated PE-backed companies on the bourses is mixed. Lovable Lingerie, backed by Sequoia Capital, made a strong debut on the stock market in March by opening at 30 per cent premium to its issue price of Rs 205 and hit a high of Rs 278 on the first day. Sequoia, through SCI Growth Investments II, had picked up 5.95 per cent stake at Rs 200 per share. Shares of Lovable Lingerie have touched a high of Rs 349.45 since their debut and closed at Rs 295.75 on the Bombay Stock Exchange on Wednesday.

In October, Matrix Partners India invested an additional Rs 25 crore in Muthoot Finance, after investing Rs 78.5 crore in July 2010 at Rs 123 per share. Matrix’s second round of investment came at a price of Rs 173 a share. After touching a high of Rs 198 on the first day of trading, Muthoot Finance shares have come down to about Rs 155 at present, 11 per cent below their issue price of Rs 175.

Sudheer Kuppam, managing director of Intel Capital, said, "One needs to have patience when investing in emerging markets. Fortunately, Intel Capital does not have LP (limited partner or investors) pressure, unlike other VCs and PEs. We are able to wait until the timing is right for an appropriate exit. We hope to see a couple of IPOs from our India portfolio later this year."

In 2010, Intel Capital had 29 exits globally – 12 IPOs and 17 exits through mergers and acquistions Intel had two IPOs in India and one acquisition in 2010.