The secular decline in stock prices for a good part of this year has prompted private equity funds to shun listed companies and opt for investment in unlisted firms. Of the 206 deals struck by private equity funds in the past eight months, 182 deals were in unlisted companies.
Interestingly, India has been largely a PIPE (private investment in public equity) market but the pummelling of stocks over the last few months has influenced private equity funds to change track.
After seeing a high of 21,000 early this year, the BSE Sensex, the benchmark index for the Indian stock markets has slid to below the 13,000 mark. The public markets have corrected by 30-40% across sectors this year. According to industry experts, there is always a difference in correction between stock market and private equity valuations.
Says the head of a global private equity fund: “It is a healthy sign when most of the PE deals happen in private companies as globally too, most of the funds invest in closely-held outfits, after which these companies are taken
public. The trend, however, has been reverse in India.”
Another stumbling block for PE funds in a falling stock market is Sebi’s floor pricing method, which makes acquisition of stocks expensive. According to this method, the stocks come at a premium compared to their current market price.
Some market players say this is a temporary phenomenon resulting out of the fallout in the stock markets.
“India has a large number of listed companies. The recent increase in the composition of PE deals witnessed in private companies vis-à-vis that in public companies is a temporary phenomenon and a function of the current market conditions.
We believe that in the next 6-12 months, the composition of the PIPE deals will increase in the overall pie,” said Bhavesh A Shah, executive director-Investment Banking, JM Financial Consultants. According to JM Financial, private equity investments in unlisted companies have risen by close to 90% from 70% in 2007.
“In the longer term, however, the activity in the private companies will be on the rise as the markets mature,” added Mr Shah.
With more than 300 PE players actively looking at investing in India, small-ticket size deals(<$25 mn) are gradually decreasing, with the average deal size being $46 mn this year.
In the first six months of 2008, PE firms invested around $6.7 bn (across 193 deals) as against $5.4 bn invested (across 181 deals) during the corresponding period in 2007. PE firms invested $14.3 bn across 420 deals during the whole of 2007, according to Venture Intelligence data.
Last month, significant activity was witnessed in real estate, telecom and financial services sectors as these accounted for 67% of the total deal value.
Though the first half of this year has seen higher growth in terms of the number and size of deals, the year is likely to end at a slower growth rate compared to the previous year.
Source: Economic Times