When steel-pipe maker Welspun Gujarat Stahl Rohren (WGSR) won the contract for the world’s deepest gas pipeline in the Gulf of Mexico from El Paso, not only did it earn accolades from National Geographic, but it also had Europe’s largest private equity firm 3i Investments sit up and take notice.
Says Anil Ahuja, managing director and co-head, Asia, 3i Investments: “WGSR is among the top few global suppliers of line pipes in the oil and gas sector. It’s a space we liked but could not get an unlisted player to invest in, so we picked up a 6.6 per cent stake in WGSR for $80 million (Rs 320 crore) from the secondary market.”
Mergers and acquisitions are passé, the new buzz on Dalal Street is PIPE—private investment in public equity—as private equity players make the 8,000-strong listed companies their new target.
While the foreign institutional investors have been busy chasing the bluechips, the private equity players have been quietly hunting on Indian bourses for small and mid-cap companies. And the sectors seeing maximum PIPE deals are cement, construction, oil and gas and infrastructure.
As a trend, PIPE is no more than five years old, even in the global markets. From $20 billion (Rs 80,000 crore) in 2000, global PIPE deals have risen to $45 billion (Rs 1.8 lakh crore) in 2007.
Till October, $1.71 (Rs 6,840 crore) billion had been invested in 16 PIPE deals in India against $1.25 billion (Rs 5,000 crore) across 36 deals in 2006.
While investment has always been allowed in listed entities, the trend has picked up over the last few years with stock markets around the world gaining pace. Traditionally, private equity firms have played a major role in incubating new businesses and entrepreneurs by not only funding but also hand-holding the promoters.
They used their expansive domestic and international network to help the investee companies attain scale and globalise. But with changing times and the pressure to deliver better returns to their investors, even long-term investors like private equity firms are not averse to making a killing in the markets.
Critics of this trend believe that it does not foster entrepreneurship, which is what private equity capital is supposed to do. However, with a oneyear lock, PIPE deals make sense in India as the barriers to listing are so low that often companies get listed much before they are ready, and end up with illiquid stock, not actively covered by institutions.
For such companies, PIPE is a cost-effective way to raise capital as it enables investments up to $200 million (Rs 800 crore), which otherwise is difficult to obtain in unlisted space.
Explains Ashish Dhawan, senior MD of ChrysCap: “Our public markets have too many listed companies and institutional money typically goes into large companies. So PIPE is a good way to attract long-term capital into midcap companies.”
Depending on regulations in different markets, such players can pick up stakes in listed entities. While a Securities and Exchange Commission filing is mandatory for such deals in the US, in India promoters are free to make a preferential allotment under Section 81/1A.
So far ignored by institutional investors, the small and medium companies suddenly have many suitors. The stupendous climb of the Sensex has made these listed companies attractive both in terms of money and time.
Explains Harish H.V., partner (corporate advisory services) at Grant Thornton: “Private equity firms do these with a view to achieving capital appreciation and it is also easy to benchmark value unlike in an unlisted company where valuation is subjective.”
However, the involvement and engagement that such investors have with companies is significantly less than what it would be in an unlisted entity as all transactions don’t ensure a board seat, as is the case of 3i Investments and WGSR.
Says Nitin Deshmukh, head of Kotak Private Equity: “Investment in PIPE has been quicker as the gravity-defying rise of the Sensex has given good returns to investors.”
This kind of investment enhances the stock’s profile as private equity players are known to do a thorough due diligence before investing.
Dhawan cites the example of one of the earliest PIPE in IVRCL by ChrysCap in 2004, when construction was not a hot sector. The entire sector got re-rated after two players picked up stakes totalling 36 per cent in the company for $18 million (Rs 72 crore).
These deals apart from being safe for investors, with easy exit and transparent valuations, also offer a significant upside for the promoters, particularly if they are in a transition phase.
For instance, Dalmia Cements (Bharat) would have been considered a modest company with revenues of Rs 650 crore in 2006. After 18 months and one PIPE deal of $25 million (Rs 100 crore) by Actis, the company has more than doubled its revenues.
Says Puneet Dalmia, managing director of Dalmia Cement (Bharat): “As a company becomes more ambitious, it has to press certain levers to align with the new target. Having a private equity firm like Actis on board has facilitated that process. They helped with environment orientation.”
The company,which is into sugar and cement, may even consider a demerger to deliver more focused results to the shareholders. Actis entered Dalmia Cement at Rs 262 and the stock is at Rs 560 today. Evidently, the equity firm is laughing its way to the bank.
Needless to say, significant value add comes if a renowned equity player is on the board. While some companies prefer to take the preferential allotment route and dilute capital to get strategic inputs from private equity players, others take this route in case of a change in environment.
This year’s budget, for instance, took away tax-free earnings of construction companies from NHAI projects, resulting in stock prices of construction companies crashing.
This hit even large players like Nagarjuna Constructions which had already got its qualified institutional placement plan cleared from SEBI, but the issue would have had no takers as the market price was lower than the issue price.
Under such circumstances, a $150-million (Rs 600 crore) investment from Blackstone came as a boon for the company.
Says Y.B. Murthy, CFO of Nagarjuna Constructions: “The investment from Blackstone was welcome as we were looking for long-term global investors who could participate at the board level and bring expertise.”
In addition to strategic inputs, global equity firms also bring with them global connections which Indian firms can leverage upon.
For instance, US based financial services giant Citigroup and private equity major Blackstone have joined hands with infrastructure finance companies like IDFC and India Infrastructure Finance Company to set up a $5 billion (Rs 20,000 crore) fund to finance the India Infrastructure Financing Initiative.
Any investee company of Blackstone would stand to gain from such developments.
From hand-holding to efficient capital, private equity firms are opening up awhole new world for India’s small and medium companies. In business, opportunity is the mother of investment. Now, it’s time to look beyond the mighty Sensex companies.
The deals and the makers
- Welspun Gujarat Stahl Rohren
Oil & gas
Private equity player: 3i Investments
Stake: 6.6%
Deal size: $80 million - Vipul
Real estate
Private equity player: Wachovia Bank
Stake: 15%
Deal size: $57 million - Nagarjuna Construction
Construction
Private equity player: Blackstone
Stake: NA
Deal size: $150 million - Ushodaya Enterprises
Media
Private equity player: Blackstone & affiliates
Stake: NA
Deal size: $465 million - Dalmia Cements (Bharat)
Cement
Private equity player: Actis
Stake: 11%
Deal size: $25 million - Jindal Poly Films
Manufacturing
Private equity player: Saif Partners
Stake: 6.6%
Deal size: $12.4 million - Sunteck Realty
Real Estate
Private equity player: Kotak Realty Fund
Stake: 10%
Source: India Today