| In spite of attractive valuations this year, Private Investment in Public Equity (PIPE) deals are increasingly falling out of favour as most deals sealed in this calendar year are in unlisted or privately held companies. |
| Out of the 87 private equity deals that were struck in the first two months of this calendar year, only 10 were in listed companies. While some experts have been saying that there will be more PIPE deals as stock prices are now attractive, the numbers tell a different story. |
| “At least for the first quarter of this year and the second quarter to some extent, PIPE deals will be impacted depending on how market conditions pan out,” says Arun Natarajan, founder and CEO of Venture Intelligence, a private equity and venture capital monitoring firm. |
| Private equity watchers point out the main reason for the slowdown in PIPE deals is a ruling by the market regulator, Securities and Exchange Board of India (Sebi), on the pricing of such stake sales. |
| The rule stipulates that the pricing should be done on the average of the weekly high and low of closing prices of shares during the six months prior to the issue and the average of weekly high and low of closing prices of shares during last two weeks, whichever is higher. |
| Going by this rule, companies are still commanding higher valuations because of last year’s bull-run in the markets. The benchmark equity index Sensex climbed over 47 per cent last calendar. |
| With markets crashing in late January and the undertone continuing to be bearish (except for yesterday’s pullback), private equity players are reluctant to dish out heavy premiums in this climate of uncertainty. |
| Though analysts agree that there will be more action on the private placement front as cash-deficit companies will look out for money, PIPE deals will see a slowdown for the time being. |
| In the past two months, the largest PIPE deal was Citigroup Venture Capital and AIG’s 16 per cent stake buy in Akruti City for $375 million. |
| Says Nitin Deshmukh, head of Kotak Private Equity, “One of the reasons is obviously Sebi’s pricing formula, the second being bad weather in markets, which has dissuaded PE players. If the markets were to fall further, their investments will take a big hit so nobody is willing to take chances. It is a wait and watch attitude for now. Companies also need to become more realistic on the valuation front for the deal in listed sector to pick up.” |
| Kotak Mahindra’s private equity arm recently invested $10 million in Hyderabad-based Heritage Foods. Heritage is promoted by Chandrababu Naidu, former chief minister of Andhra Pradesh. Heritage Foods’ share price has plunged 46 per cent since the meltdown. The deal was announced on January 2. |
| “Promoters are also not willing to dilute large stake for the same amount of money. They are waiting for the correction to get over so that they can attract better premiums. If a deal in a private company fetches- say x per cent returns, a PIPE investment will fetch x-10 per cent returns, but with a hazy outlook on the markets, even that looks difficult,” said a director and CFO of a well-known venture capital firm. |
| Even pre-IPO placements will take a hit because the IPO market is in shambles, agreed experts. Until secondary market recovers, deals in listed space will have to be put on hold. |
Source: Business Standard