PE funds use rally for partial exits

Private equity (PE) funds seem to be making hay while the sun shines. With markets having recovered by almost 30 per cent from their lows, a clutch of PE funds have used this opportunity to partially exit some of their portfolio companies.

Private markets are still in a distress mode and, hence, PEs are seeing the current rally as a chance to encash some of their PIPE (private investment in public equity) deals.

Citigroup Venture Capital International (CVCI), the venture capital arm of Citigroup, sold a 4.96 per cent stake in Techno Electric & Engineering through a block deal on one of the stock exchanges. CVCI continues to hold a 5.5 per cent stake in the firm.

It had invested Rs 68.64 crore in the company in 2006, on which the fund is assumed to have made Rs 100 crore subsequently, including stake sales though bulk deal transactions.

CVCI is not the only one. 3i Group sold a 1.42 per cent stake in Mundra Port & SEZ on March 28 through an open market transaction totalling Rs 165.33 crore. 3i had picked up a 1.78 per cent stake in the firm in 2006 for $50 million in the form of convertible bonds. It continues to hold a 0.36 per cent stake in the Adani Group firm.

Similarly, IDFC PE diluted a 0.58 per cent stake in GSPL for Rs 12.66 crore though an open market transaction on April 2.

“PE managers will need to generate liquidity to pay back to their LPs (limited partners). This is the time when one can at least see a decent IRR (internal rate of return). So, the funds which had invested in 2005-06 will try to encash on this opportunity. The trend will become more defined if the current market rally continues,” said Bharat Banka, CEO, Aditya Birla Private Equity.

Exits had become the most difficult part of PE funds in 2008 and year-to-date 2009. With valuations crashing to below normal, none of the PE funds wanted to exit at a loss. The funds, which exited at the peak of the bull run in 2007, were probably the smartest in the industry as valuations were way too high, clocking extraordinary returns then.

According to Venture Intelligence, the number of investment exits by PE funds more than halved to 21 transactions for 2008-09 as compared with 50 such deals in the previous fiscal.

The recent market recovery has not only revived exits but has also resulted in a couple of PIPE transactions.

Recently, Stanchart PE acquired a 2 per cent stake in M&M Financial Services through an open market transaction. New Vernon also picked up a 3.3 per cent stake in Indage Vintners through the same route.

“A lot of funds who bought in 2007 at higher costs will try to buy in the open market to average out their costs. Exits too will become more pronounced as people are waiting in the wings to get out at the right value,” said Sanjay Bansal, managing director, Ambit Corporate Finance.