Market slump makes PE firms' exit difficult

While earlier, exits through IPO route were common due to a buoyant market, the current slowdown will make such exits a thing of the past.

“The environment for exits is terrible,” says ChrysCapital senior managing director Ashish Dhawan. Most private equity firms invest in mid-cap companies, where liquidity has dried up, he explains. Numbers, too, point to a slowdown on exits through IPOs.

Data from Venture Intelligence for the first half of 2008 suggest that PE players made six exits through IPOs. Last year, 16 exits took place via IPOs while the number for 2006 was 19.

Today, in a pessimistic market scenario, a lot of IPOs have been deferred. “In a bull market, an IPO is one of the easiest ways to exit,” says KPMG India head of private equity, Vikram Utamsingh. So, what are the other options?

“While IPO is a tough exit option, one could be through secondary sales or a strategic sale,” explains Venture Intelligence CEO Arun Natarajan. A secondary sale is one where a smaller private equity player sells to a bigger private equity player.

Take the case of ChrysCapital, which partly sold its stake in Shriram EPC, in a pre-IPO deal to the US-based Argonaut Partners. “For an investment made three years ago, the company size could have multiplied and in the current scenario, its requirement for funds and guidance could be met better by a bigger partner,” says Crossover Advisors CEO Vinnie Vyas.

Finally, there is the option of selling out to a strategic partner. Take the case of Actis, which sold its stake in Punjab Tractors to Mahindra and Mahindra, thereby helping the tractor industry consolidate in India.

“While the going till now has been easy, those private equity firms will have to work hard and bring in their contacts and strategic guidance to grow companies. This is before they can exit and think of returns,” adds Barings Private Equity Partners Managing Partner, Rahul Bhasin.