Private equity (PE) firms favour clubbing when it comes to striking deals. Unlike in the past, when PE firms were single investors in a company, they now prefer to join hands in putting money in firms. Early this year, Temasek Holdings, an investment arm of the Singapore government which is the only foreign institutional investor in Tata Teleservices, seemed to be content being one of the investors in an eight-way deal to invest close to Rs 4,800 crore in Bharti Infratel.
If eight is fine, then consider Idea Cellular’s transaction. The telecom company struck a nine-way deal with private equity funds, which is probably the largest ‘club deal’ in India by private equity firms. Similarly, Reliance Telecom roped in seven foreign institutional investors including New Silk Route, Galleon, Fortress, GLG, Quantum, DA Capital and HSBC Principal Investments. Although there is nothing unusual about PE firms adopting the group approach, what is striking this time is the coming together of a varied number of investors.
Says a senior official with a large buyout fund, “Multiple set of investors helps in diversifying the risk specially linked to new business model such as the telecom tower business and also in getting more knowledge on the board of the company.”
Globally, this practice is followed by PE funds as it enables them to execute large buyouts at a good price. Besides, it minimises the competition for targets. In India, such a trend is slowly emerging. “While conducting our second fund-raising exercise, we wanted to see the retail chain to be valued at a superior notch. This is better realised with a fresh set of investors who justify the new price too, “ a senior executive from Cafe Coffee Day said.
Recently, at Cafe Coffee Day, two new investors walked in and invested $95 million. Instead of clicking a deal with existing investors such as Sequoia Capital and International Finance Corporation, the coffee chain opted for new sponsors in Deutsche Bank and Templeton Darby Investments.
The company executive added that having multiple investors would also help the company as and when it decides to hit the capital market. “It is a long-term benefit.” According to some analysts institutional investors are not willing to put all their eggs in one basket.Unlike in the past when funds preferred to have the ‘exclusive’ tag with a company, they now prefer clubbing together to clinch a deal. The change in business approach is because of the volatile stock markets, which has impacted valuations of many companies. Funds that had earlier invested at high valuation are not too keen to increase their exposure , given the change in scenario.
After registering a high of 21,000 in January, the bellwether BSE Sensex, has been on downslide. The public markets have corrected by nearly 40% across sectors this year.
Kotak private equity fund’s head Nitin Deshmukh said, “It happens very often in a situation where an investor has invested at a high valuation when the markets where at its peak and later on they are reluctant to invest at a more higher valuation compared to the earlier price.” Kotak Realty fund recently checked into LemonTree Hotels, an upscale mid-market hospitality chain, which also has Warburg Pincus and Japanese’s Shinsei for company.
A lot of time companies in their agreements with financial investors have a covenant which stipulates that the company cannot sell shares to anybody at a price which is lower than the price at which shares were placed with their first set of investors. These covenants are part of the agreements of mostly mid-cap companies since they generally obtain a higher premium.
According to Venture Intelligence data, in the first half of 2008, PE funds invested close to $6.7 billion (across 193 deals) compared to $5.4 billion invested (across 181 deals) in the same period last year. Though the first six months of 2008 has seen a higher rise in terms of quantity and size of deals, the year is likely to end at a slower growth rate compared to 2007. PE funds invested $14.3 billion (across 420 deals) in 2007.
Source: Economic Times