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On June 20, US-based private equity major Blackstone - one of the early investors in India - sent a late evening communication to the stock exchanges that almost went unnoticed. The US-based fund sold a 5.5 per cent stake in textile exporter Gokaldas Exports to ICICI Bank at a huge loss of Rs 84 a share, compared with its acquisition price of Rs 275 a share. Blackstone had bought a 68 per cent stake for $158.7 million in 2007, and took control of the company.
Blackstone is not alone in exiting with a haircut. Goldman Sachs exited from Bharti Infratel by selling its stake for $37 million against its $125-million investment in 2007. 3i India Infrastructure Fund exited Adani Power for $60 million against an investment of $125 million, and Warburg sold its shares in Punj Lloyd with a significant haircut at $12 million - losing close to $88 million in the process.
Lack of exits has been one of biggest problems facing private equity players in India. Many investments were made at high valuations in 2007 and 2008, and thereafter, they underperformed. The PE firms have been under tremendous pressure to return capital to their investors, called limited partners (LPs). Many PE firms, which were stuck with these investments, seem to be now taking bold calls. They are increasingly coming around to a view: If we can't turn around an investment, let's try and get out.
"Most of the guys who are making exits with haircuts are global investors, where the investment committee is sitting abroad. They are telling their local teams, There's no point in holding onto these investments, so let's get out," says a senior executive with a Hong Kong-based investment firm (limited partner), which has invested in eight PE funds in India.
A PE head says many investments got stuck in India due to sagging fortunes of industries such as infrastructure and power. Most of the companies operating in this sector were caught in red tape, lack of environment clearances and extensive disputes over land acquisition during the United Progressive Alliance regime. The policy paralysis in the past three years resulted in many funds going home empty-handed.
According to experts tracking the sector, exits at a loss are mainly due to headwinds faced by the companies owing to a slowing economy. "Stock market performance of a company is a barometer of its own performance and also of the sector to which the company belongs - over the past few years, most sectors other than consumer-driven services have faced headwinds and this has impacted the valuations of the companies in those sectors," says Sanjeev Krishan, leader - private equity and transaction services at PricewaterhouseCoopers.
It is also important to note that certain sectors are more cyclical than others and this might impact valuations in the short-term. However, the most important factors are the choice of sector and how the specific management or company deals with the external environment, says Krishan.
However, some experts say with the Indian stock markets going up and sentiments changing to positive after a stable government led by Prime Minister Narendra Modi at the Centre, funds could see exits at a profit. "We are headed for good times. The future exits may not be at a huge loss at all. There are a lot of expectations from the next Budget, which will certainly help in sentiments improving further," says Motilal Oswal, chairman of Motilal Oswal Financial Services, which manages PE funds worth Rs 1,800 crore.
