Private equity funds remain invested in portfolio companies for about 5-8 years and exit at a premium, with an average of 25% returns, at the end of their tenure. Reports suggest that PE funds in India may look at exiting investments worth $30 billion during the current year, those made in 2007-08.
PE funds invested around $19 billion in India in 2007, the highest ever in a single year. This was followed by investments of around $10 billion in 2008.
The collapse of Lehman Brothers in 2008 triggered a global financial crises affecting Indian economy as well. Several other factors, such as challenges on the domestic front and an economic crisis in the Eurozone, arrested any significant inflows in the years to follow. Many funds couldn’t exit their investments due to subdued valuations.
But 2015 marks the end of the eight-year period since 2007 and, two, a recovery in the domestic economy this year is imminent under the new, pro-reforms government. However, with a third of this $30 billion invested in sectors like real estate and infrastructure, which are still grappling with challenges, PE exits may be difficult.
A lot of PE money went into long-gestation projects like retail malls, townships and property investments in tier II and III cities between 2005 and 2008.
PE funds are looking to sell their stakes in such projects back to the developers, but in some cases the latter are not keen. In such situations, the PE fund can consider the arbitration route if it was a structured finance deal. But if it was a pure equity deal, one has to try and come up with a mutually acceptable solution.
The anticipation of an economic rebound has also led to an upswing in Indian bourses, with the Sensex offering a return of around 14% in rupee terms over the last six months. As a result, PE funds may look at exit routes such as initial public offerings (IPOs) later this year, which weren’t preferred in the last couple of years as the markets remained choppy.
Promoter buyback and secondary sales will be the preferred options for most PE players, since there is a bit of an inertia in the IPO market with the experience of investors not being very positive in India – saya experts at Ikia Consulting Services.
According reports released, the average ticket size of PE-backed deals in India has been on the decline even as the volume of transactions has risen. In 2014, PE funds concluded 604 deals with an aggregate value of $12.4 billion. The average deal size stood at $20 million last calendar, down from a high of $59 million in 2007. The number of deals transacted in 2014 was the highest in a decade. The average deal size stood at $59 million in 2007. This decreased to $20 million in 2014. Yet, in volume terms, 2014 saw a rebound in PE investments, recording 604 deals, the highest number of investments in a decade.
The e-commerce space within the larger IT segment garnered significant amount of investments, with the sector attracting a third of the total investments made by PE funds in 2014 through 100 deals. A number of small to medium-sized e-commerce ventures raising small amounts of capital was responsible for pushing up the overall volume and bringing down the value of transactions. The last calendar saw 100 PE exits, which returned over $5billion to investors.
Looking forward, a number of PE funds were keen to evaluate opportunities in companies that sold food products due to expected margin expansion on the back of declining packaging costs led by a fall in crude. Investors will also be eyeing the manufacturing sector.
Overall domestic demand-driven sectors are making a comeback (when it comes to new investment opportunities for PE funds). For many years export-driven sectors like IT and pharma were in vogue. But domestic demand-driven sectors like education, healthcare, financial services, and logistics may find favour now, feels experts at Ikia Consulting Services.