A technical factor seems to be hindering PIPE (private investment in public enterprises) deals or private investments in public enterprises, which should have been a no-brainer with shares of listed companies now quoting at eye-catchingly attractive valuations.
According to rules set by the Securities and Exchange Board of India (SEBI), the preferential allotment of shares (which is necessary to consummate a PIPE deal) have to be done at a price, which is higher of the following two: 26-week average of the weekly high and low closing prices of shares as quoted on the stock exchanges where the shares of the target company are most frequently traded or average of the daily high and low prices of shares during the two weeks prior to the date of the preferential allotment.
With such a clause, the price that private equity players have to shell out for stakes in companies is still relatively high.
“A number of PIPEs have been put on hold for this technical reason,” says Shiraz Bugwadia, director of investment banking firm o3 Capital.
Private equity players now seem to be in a wait-and-watch mode, hoping that prices remain at current levels for a while, thus reducing the average. If it turns out as they hope, then expect a gush of such deals.
Niren Shah, managing director of Norwest Venture Partners, expects the public market deals to be “more robust in a couple of months”.
Apart from this technical factor, a couple of other issues too seem to be obstructing such deals.
One is that promoters of companies are yet to reset valuation expectations downwards, despite the markets being in doldrums over the past 3 months. Many promoters still believe this is a temporarily lean phase, with the reality of the global credit crisis and the recession in the US not registering.
The other is that private equity firms are still licking wounds they inflicted upon themselves by going overboard with PIPE deals in the last couple of years.
A DNA Money analysis last month, with data provided by Venture Intelligence, showed that over 60% of the 51 PIPE deals consummated in 2007 are out of money.
Ditto with 2006 deals, with almost 40% of the 41 deals in that year, having lost money.
The list includes even respected big boys such as Carlyle, Fidelity, Goldman Sachs, Macquarie, Credit Suisse, General Atlantic and ICICI Venture.
With deals gone bad fresh in their memory, it doesn't surprise that they've turned more cautious.
“PE players want to take informed decisions. They don't want to be taking paper in a market that is up 900 points one day and down by the same degree the next,” said Vineet Suchanti, managing director of Keynote Corporate Services.
Source: Sify