PE funds fail to get their exit timing right

Some number crunching by ET shows that although global PE majors like Warburg Pincus, Baring, ChrysCap and Citigroup Venture Capital have made big profits from their Indian investments, they would have pocketed a few billions more had they held on to their shares for a little bit more. And this is exclusive of the dividend money which would have accrued to them while they were holding the stock.

Given the spectacular bull run over the last couple of years in the Indian stock markets, the value of the listed firms rocketed sky high. While some PE funds timed the market right by exiting at a price with a fair degree of profits in Actis-Punjab Tractors, IDFC Private Equity-Hotel Leela Venture, many others made huge losses from their early exits, notionally speaking.

Take Warburg Pincus’ investments in Bharti Airtel. This has been the most valuable exit by any PE firm in the country till date. The PE firm had invested Rs 1,300 crore in 1999 in the telecommunication company. Subsequently, through various partial exits, it made a phenomenal Rs 8,496 crore, or $1.9 billion, at the time of the final exit, taking home more than six times its original investment.
Now look at what it lost. As of February 11, 2008, the value of shares that Warburg Pincus held before it started selling them in 2004 works out to Rs 29,094 crore, or around $7.2 billion.

To be fair, Warburg Pincus held the shares for about seven years in Bharti. On an average, PE firms typically stay put in a firm anywhere about 5-10 years. The PE funds need to sell out even if they see the value of their investment going up because the funds have a life period which stretches for about 10 years in general at the end of which the original investors are returned their money. This separates PE firms from other companies or strategic investors, who usually acquire for perpetuity.

Warburg made an even swifter exit from another significant investment in India, cement giant Gujarat Ambuja(now renamed as Ambuja Cements). The PE firm had invested nearly Rs 270 crore in 2001 in the company and pocketed close to Rs 827 crore through two separate transactions in 2005-end. The value of the shares that Warburg Pincus held initially would have fetched it more than Rs 1,144 crore at today’s price.

Warburg is not the only one to have lost out to bigger gains. Other early entrants to the PE/VC scene in India like Actis, ChrysCapital and Citigroup also could have potentially made a bigger killing out of their investments. In fact, these firms made quick exits from some firms.

Actis, for instance, lost a great deal by selling a tad too soon in UTI Bank (now Axis Bank). The PE firm, which had invested around Rs 158 crore in 2001, pulled out within three years, pocketing nearly Rs 437 crore. However, this was one multi-bagger it lost out big time. The value of the bank shot up considerably after Actis sold out in 2004, and the current value of its investments stands at Rs 4,314 crore, or $1.1 billion. Actis’s other major exit was timed right. The PE firm had sold its stake in Punjab Tractor to Mahindras last year at a price which the scrip never got to see again.

ChrysCap also has its shares of early exits and the mother of them all was Suzlon. The wind energy equipment firm was a corporate nobody when it made pre-IPO placement. ChrysCap, which had put Rs 50-100 crore in August 2004 into Suzlon, encashed partly before its listing and the balance in 2007. In the process, it would have pocketed about Rs 1,374 crore. A fine investment and equally great exit, one may think. But had it held on to the shares, it would have been valued at Rs 2,810 crore. The PE firm eventually exited Suzlon last year.

Ditto Citigroup, which had invested a similar amount in Suzlon at an even better pricing term before the IPO. Citigroup’s value of shares that it held soon after the listing of Suzlon in 2005 today stands at a phenomenal Rs 3,477 crore, or nearly $870 million. It had invested close to Rs 100 crore(about $22 million then) initially, half of which was in the form of debt.