Tuesday, March 20, 2007

Latest trends in Indian PE

A recent report indicates that the share of private equity (PE) investments in listed companies in India, which accounted for as much as a third of all investments in 2005, fell to 22 per cent in 2006. Some of the companies from which PE funds have exited partially or fully in recent times include Punjab Tractors, Simplex Infrastructures, IVRCL and Gammon India. A similar trend of PE exits from publicly-listed companies in the US has also been seen, though the reasons may be different.

In India, this development comes at a time when private equity is gaining currency. With an estimated 100 private equity funds swarming around for deals, India is now one of the fastest- growing private equity markets in the region. And although the stock markets have scaled record highs (despite the current volatility), the preference by private equity for listed companies seems to be changing. How is this to be explained?

Some of the obvious reasons include –

a) Indian market has been one of the best performing markets. It’s time they book some profits now that it’s late in the day.

b) India growth story is continuing and a little churn in portfolio will give every PE that extra % comfort in terms of RoI and enable fresh round of investments.

c) Average deal size in India is still small barring a few. As such it doesn’t justify longer holdings aiming at large scale returns.

d) Natural Indian scepticism wouldn’t let owners dilute substantial stakes in favor of PE firms as they are not sure of the value PE firms bring to its businesses.

e) Looming threat of Government scrutiny over buyout deals – Few examples are of Vodafone acquisition of Hutch Essar, Punjab Tractors exit by PE firm Actis (formerly CDC ) and Burmans, acquired by Mahindra & Mahindra. In the US, it’s the rigor of SOX Act compliance which eases PE firms out of Public listed companies.

As such, now PE investors appear to be more comfortable with a fund of funds model – invest as LPs in other PE firms who are already in the fray. One of my earlier posts explaining the advantages of FOF model is here.

Isle of Man-based Evolvence India Holdings is planning to raise $65 million (Rs 290 crore) through placement of shares on London Stock Exchange. EIH, a private equity fund company which principally targets investments in the Indian subcontinent would place up to 65 million ordinary shares of one dollar per share, a statement to the London Stock Exchange said. The public listing of EIH on LSE's Alternative Investment Market (AIM) will give investors access to a diversified Indian private equity portfolio, while mitigating issues usually associated with private equity investments, such as a lack of liquidity and relatively large minimum investment size.

Evolvence has already invested in Indian PE funds such as IDFC PE, Barings India PE, etc.

US-based Investment bank Thomas Weisel International is planning a $200 million private equity fund of funds for India. The company is also keen on rolling out its asset management business in India, focusing only on institutional investors. The fund of funds, which is yet to close, has already made two investments worth $25 million in IDFC and ilabs.

Sounds cool ?

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