Venture Intelligence data spanning the last four years shows that the maximum inflow of funds occurred during the October-December quarter. This would imply that there are in-built incentives that propel PE investments during this season. May be, annual targets?But, PE players insist annual targets don’t drive them. They say investments are structured with respect to the return on investments and not any seasonality. Chrys Capital MD Sanjiv D Kaul called the pattern a mere co-incidence. Carlyle India head Shankar Narayanan said following a seasonal methodology to investments would be ‘suicidal’ for any PE investor. Mr Harish Fabiani, chairman of Americopr Group and a Madrid-based non-resident Indian who launched a $200-million India Industrial Growth Fund said there is simply no logic behind the pattern.
“There is no logic, but it’s still possible that some fund managers want to close the deals before the holiday season begins,” Mr Fabiani said. Other industry players that ET spoke to ventured to suggest more reasons behind the pattern. Some investment bankers attribute the trend to a couple of drivers – the buoyancy in secondary markets that give better valuation and that investors have better visibility into project earnings for the current financial year since they are 6-9 months into the year.
“We have closed more deals in the Oct-Dec period than all the other quarters. Our numbers indicate that it’s the busiest quarter,” said Mr C Venkat Subramanyam, director, Veda Corporate Advisors.
Spark Capital ED and head-investment banking K Ramakrishnan drew a parallel with the secondary market to explain the penchant for the last quarter among PE s. “If you see an intra-year pattern, there is always a heightened buoyancy in the last quarter of the calendar year in the secondary markets – the same could be applied to PE activity,” he said. In terms of the financial year too, while the activity during the April-July period is muted, the August-October period sees more of a wait and watch pattern. But it’s the October-January period when investments really peak. “Historically in India, the festival season is seen as a good time to make investments,” Mr Ramakrishnan added.
A lot of companies start the fund-raising activity in the first quarter of the financial year. So, they typically end
up closing the fund in the end of the year. “Also, if you raise the funds towards the end of a year, you’ll have one full year to get the investments into the system. But when the fund is raised mid-way in the year, the impact is not that strong,” added Mr Subramanyam.
One investment banker who did not wish to be named says he remembers a couple of times when the mandate was to finish the deal before the end of the year. “It’s true they don’t work on annual targets but most foreign funds work according to the calendar year. So, if a deal is originally supposed to close in January, they try their best to advance it to December.”
So what does it mean for companies that want to raise funds? It addresses concerns related to valuation. For example, if a deal closing runs into February 2008, the promoters will expect better valuation based on FY ‘09 projections, but investors wont have too much visibility into FY ‘09 earnings, so it becomes harder to agree on a valuation.
“But in the Oct-Dec (which is Q3 of the financial year), investors have good visibility into projected earnings for the current financial year, since they are 6-9 months into the year,” said Mr Kapil Viswanathan, co-founder and CEO of publishing services KPO PreMedia Global, which raised Rs 72 crore from JM Financial India Fund in January this year.
Mr Ramakrishnan agreed and said, “My chances of getting a better valuation is much stronger on the back of performance in the last six months rather than giving the projected earning for an entire fiscal.”
Maybe, four years is still too short, and we don’t have enough data to draw a conclusion. But if you want to raise money from a PE firm, you know when to try.
Source: Economic Times