Private Equity (PE) firms, whose investments have got stuck for the last 4-5 years due to lack of exit opportunities, are in a rush to sell their stake to peers. Due to the tough initial public offer (IPO) market, 2011 witnessed largest size of secondary transaction in Indian PE space.
With the beginning of 2012, the PE industry witnessed two major transactions worth $200 million (about Rs 1,000 crore), where Warburg Pincus and General Atlantic bought stake in Indian firms through secondary route. Vikram Utamsingh, head-Private Equity Advisory, KPMG India, said: “Those who invested in 2006-07 are keen to exit their portfolios and a key option in front of them is the secondary route. They are ready for an exit if they get a 15% or more internal rate of return [IRR].”
According to a recent KPMG report, private equity in India has returned a gross IRR of 17.9% which is only slightly above the 14.4% that investors would have earned if they had made the same investments in the Sensex for an investment period of three years. Adjusted for the five year holding period, this implies a required gross IRR of 25%, it said.
This year, Olympus Capital Asia’s Rs 500-crore investment for a significant minority stake in DM Healthcare, allowed India Value Fund to make a part exit from its 4-year-old investment in DM.
Also, Mayfield Fund, a US headquartered private equity fund with a presence in India, has completely exited from its investment in Fourcee Infrastructure Equipment, after Fourcee received $104 million from private equity major, General Atlantic.
“A PE firm buying these stakes allows the investee company more time to perform and IPO when the markets are more upbeat,” Utamsingh said.
During last year, real estate space witnesses the largest secondary deals.
In August 2011, through its $200-million (Rs 875 crore) investment in an SEZ, promoted by Embassy Property Developments, Blackstone financed the buyback of HDFC Property Ventures’ 5-year-old stake by the Embassy group.
In March 2011, Kotak Realty Fund, had sold its wholly owned undertaking Peepul Tree Properties to Tata Realty and Infrastructure (TRIL) and Tata Realty Initiatives Fund 1 (TRIF 1) for an enterprise value of Rs 525 crore ($117 million). On an initial equity investment of Rs 95 crore which made in 2006, Kotak Realty received over Rs 400 crore from the exit including internal accruals.
According to V Hari Krishna, director, Kotak Realty Fund, real estate will witness more secondary transactions this year, especially in areas of IT Parks, IT SEZ and hotels. “Through secondary deals, the new investors will be able to buy projects with lesser risk as compared with the initial investor,” he added.
Industry expects that more secondary transactions are likely to happen as the revival of the IPO market may take more time.
Girish Nadkarni, head of equity capital market at Avendus Capital, said: “There are not too IPOs that are able to hit the market. This situation might take another a couple of months to improve.”
V Jayasankar, executive director and head of equity capital markets at Kotak Mahindra said: “The liquidity that is coming into the market will help the primary market. If the budget is good, one can hope for a revival in the primary market.”
According to Bloomberg data, last year witnessed 37 IPOs which raised Rs 5,972 crore against 65 IPOs that raised Rs 37, 757 crore in 2010.
Source: Business Standard