The recent slide in stock prices has come as a boon for private equity investors, many of who had bought stakes in listed companies via private placements at frothy valuations. Some of these entities are now buying the shares of these companies through the secondary market at lower prices, thus lowering their original cost of acquisition.
“When private equity firms see long-term potential in the companies they have invested in, they resort to dollar-cost-averaging when the market corrects. This is what has happened of late,” said Nexus India Capital CEO Sandeep Singhal.
Among notable instances of such secondary market purchases, Apax Partners hiked its stake in Apollo Hospitals to 14.52% as on June 2008, from 12.01% in December 2007. In another case, Standard Chartered Private Equity, which had 5.47% stake in M&M Financial in March 2008, raised its holding in the company to 7.93% by June 2008.
Similarly, New Vernon Private Equity’s stake in the recently-listed Shriram EPC was 5.53% in June 2008 as against 5.44% in March 2008, according to BSE.
“In India, private equity funds actively participate in the listed space. When you have done a PIPE (private investment in public equity or listed companies) deal, this activity is a logical extension, as price corrections give them a more compelling reason to acquire more shares from the open market,” said a senior official at ICICI Venture.
Investment bankers say many private equity firms are unable to or do not invest the entire money that has been earmarked for a listed company at the time of the private placement. This is because managements may not be willing to allot a big stake to a single investor, especially a private equity, as many of them are known to keep company managements on a tight leash. Also, companies ask for higher valuations for bigger chunks of shareholding, which may not justify their actual valuations.
“Private equity firms do a thorough due diligence on the company and they know its fair price. So, they would prefer to wait for a fall to accumulate shares and consolidate their holdings in the company,” said an investment banker, who has brokered several private equity deals.
In the last couple of years, several listed and unlisted companies raised money from private equity firms in exchange for a stake. Most of the deals were done at valuations favouring companies amid the frenzied bull-run. So, for funds, which were waiting for a market fall to raise their stake in any company, the slide has given them the opportunity.
But, industry officials and investment bankers say accumulating shares in an investee company is not as easy at it appears.
“Such purchases without the consent of the company management can burn bridges between the two parties. A lot depends on the relationship between the management and the fund and the extent to which the private equity has added value to the investee’s growth,” said a top official with a Bangalore-based private equity firm.
Source: Economic Times