ICICI Venture’s cancellation of plans to invest $800 million (Rs 3,200 crore) in Jaypee Infratech and Kishore Biyani’s Indivision India Partners’ reluctance to go ahead with its $62.5 million (Rs 250 crore) investment in Dish TV are just two instances of a rather horrid picture for private equity deal flow in India.
Industry sources say that there are a number of such deals where brakes have been slammed in the last minute due to the recent stock market meltdown. As a result, there’s a widening gap between what a private equity firm is willing to pay and what the promoters of the company are willing to accept.
Blackstone and the private equity arm of Goldman Sachs are two firms that are said to have pulled deals, but DNA Money could not ascertain this.
“I know of 8-10 other deals worth about $300 million that have fallen through,” said Gaurav Mathur, managing director, India Equity Partners, a $350 million India-dedicated fund that has made six investments so far. He was not comfortable disclosing names.
“In more than two-thirds of the cases, where term sheets have been signed, valuations are being renegotiated,” added Ranu Vohra, managing director, Avendus Advisors, an investment banking outfit.
Very few are willing to talk about it though, because some deals have even been falling through after definitive documentation on the deal has been signed.
A private-equity investor starts the investment process after a business diligence. In this, it analyses the sector in which the company operates, takes stock of the competitive position of the company within that sector, and checks on the company’s management.
Following this, a term sheet is signed, and then a legal and accounting diligence is done. It’s after this that the definitive documentation, relating to the final modalities of the transaction in question, is signed.
Mathur says that deals have fallen through at all stages of this evaluation process because of the lower valuations that companies now command after the market collapse that began in mid-January 2008.
Terms agreed upon, in say November or December 2007, look frightfully expensive for the investor now. Renegotiation is an alternative, but as Mathur says, “Promoters get upset because they don’t reset expectations so quickly.”
“It takes about 6-8 months for expectations to change,” adds Vohra.
Further, renegotiating a deal means going through the entire process again.
Sources also said that investment committees of foreign funds operating in India have asked their key personnel in India to bring more financial discipline into evaluation.
“There has been scepticism surrounding Indian valuations over the last six months. And that scepticism has now been proved right, going by the rationalisation that has come in,” said Vohra.
With US financial institutions struggling, fund-raising is also a concern. “Liquidity coming from the US has dried up, and therefore, fund-raising will be difficult,” said Vohra.
An old hand investing in Indian companies who did not wish to be named said the opportunistic nature of funds to pounce on companies when the going was good, and then pull out of a commitment when the market reversed, needs to be questioned.
“Private equity is a game of trust between the fund and the corporate. This trust being broken will not be good for the industry,” he said.
Source: Sify