Investors make only partial exits through IPOs

Despite a flood of IPOs in 2015, most investors chose to retain their stakes in investee firms as they hoped to make better returns in future

Even as there has been a rush for private equity (PE)-backed initial public offerings (IPOs), these investors do not seem to be in a hurry to fully encash their investments. Be it the ongoing IPO for Sequoia-backed Quick Heal or the recently-concluded offering for ICICI Venture & Gaja Capital-backed Team Lease, the PE investors have chosen to sell a part of their stake.

According to VCC Edge, there have been 17 PE-backed IPOs since January last year, of which 14 saw the PE investors offloading a part of their stake and three saw no exits at all. There is no sign of full exit by any PE investor, despite the revival of the IPO market after five years. In 2014 and 2013 there were only two PE-backed IPOs each year in which investors had part exits. But in a market with such a low investor appetite, full exits are hardly an option. It is only when IPO market is robust a PE investors can choose to make full exit.

"At times, IPOs just establish a valuation benchmark for PEs. They might part exit with a view to securing a part or whole of their capital, and continue to be part of the future journey of the company," says Sanjeev Krishan, partner and leader, private equity & transaction services at PricewaterhouseCoopers India.

Sequoia Capital invested Rs 36 crore in Quick Heal in 2010 and separately bought shares worth Rs 24 crore from promoters of the firm. It currently holds a 10.25 per cent stake in the company with an investment of Rs 60 crore. It is now selling less than half of its holding in the offering for about Rs 87.8 crore, indicating a return of three time in over five years.

 

 

The fund has used the IPO as an opportunity to secure its capital, make a small profit out of it and at the same time ensure that it continues with the company's growth journey. Same is the case with the IPO of Team Lease where ICICI Venture and Gaja Capital have sold a part of their stake.

The revival of IPOs has also given the companies an opportunity to raise capital from the public market at a better valuation than what the private market would offer. VCC Edge said the IPOs of Syngene International, Coffee Day Enterprises as well as Adlabs Imagica were not really to give PE investors an exit opportunity.

Mid-market buyout specialist India Value Fund Advisors (IVFA) picked up a 10 per cent stake in Syngene from its parent Biocon in September 2014. IVFA bought the stake soon after Biocon provided exit to GE Capital by buying out its 7.7 per cent stake for Rs 215 crore, giving it a return of 100 per cent on its 2012 investment.

Within a year, Biocon chose the IPO route to raise further capital through diluting its holding in its subsidiary.

IPO EXITS IN 2015

Investee names	Sellers	Stake	Exit value	Retained
		sold (%)	($ mn)	stake (%)
Narayana Hrudayalaya	JPMorgan Partners	6	46.21	4.67
	PineBridge Capital Partners	4	30.81	6.98
Dr Lal PathLabs	Westbridge Crossover Fund	1.79	13.51	12.88
	TA Associates Advisory	7.12	48.52	9.21
Sadbhav Infrastructure Project	Norwest Venture Partners	1.37	7.85	6.88
	Xander Advisors India	2.3	13.1	5.97
Prabhat Dairy	India Agri Business	6.73	12.02	7.63
Pennar Engineered Building Systems	Zephyr Peacock India Fund III	6.73	16.09	15.62
S H Kelkar and Company	Blackstone Advisors India	9.15	38.16	23.92
UFO Moviez India	Providence Equity Partners LLC	11.2	28.37	10.29
	3i Group Plc	15.45	39.13	20.28
VRL Logistics	New Silk Route PE Asia Fund LP	15.95	46.66	5.16
Power Mech Projects	India Business Excellence Fund-I	14.47	20.84	1.28
Shree Pushkar Chemical & Fertilizer	India Enterprise Development Fund	1.32	6.71	2.13

Source: VCCedge

"PE-backed IPOs have not necessarily been the case for investors' exits," says Vishal Nevatia, managing partner, India Value Fund. "Companies prefer raising funds from PEs when they are evolving. But, they like to tap the public market once they mature, as it offers equity at a cheaper valuation," he says.

Adlabs Imagica went public to raise cheap equity than to provide exit to its PE investor ICICI Venture, which had invested less than two years ago. But, there are also PE investors such as New Silk Route, which chose not to exit despite being invested for over five years in Coffee Day Enterprise. The company tapped the public market to raise additional capital to fund its growth.

"There have been a combination of facts at play. In the last nine months, barring the sharp volatility experienced since Jan 2016, the sentiment in the primary capital markets improved significantly and became a very attractive option for companies," says Vikram Hosangady, head of deal advisory and national leader private equity at KPMG India.

"Having said that, should the current volatility continue for a few more weeks, the sentiment in the primary markets may deteriorate and secondary sales between PE funds maybe a more preferred option," he says.