With shares of many companies available at 30-40% discounts to their all-time highs of early January, private equity funds are salivating.
MUMBAI: The law of unintended consequences seems to be at play in India’s financial markets.
With shares of many companies available at 30-40% discounts to their all-time highs of early January, private equity funds are salivating.
Many feel they did not get their share of deals in India when the markets were scaling new highs every day — the Sensex had made an all-time high of 21,206 on January 10, 2008 — as multi-strategy hedge funds, which also operate in the private space, took away most of what was on offer.
Neither were the promoters of companies averse to off-loading stakes to these hedge funds, as the latter were willing to pay more than private equity funds.
Now that valuations have come down drastically (the value of a private company is determined on the basis of the value of a listed peer), private equity investors, who would look at the safety and security in an investment much more than hedge funds, feel there will be more deals happening from their side.
“It is a good time to be a buyer with a longer term horizon,” said Anchit Gupta, associate at Kubera Partners, which manages a $225 million private equity fund which’s listed on the London Stock Exchange’s Alternative Investment Market.
“The returns thresholds of hedge funds tend to be much lower than that of private equity funds, and their time horizons much shorter,” adds Alok Sama, founder and president of Baer Capital Partners, which manages a $225 million India-dedicate private equity fund.
So, while private equity funds seek 25-30% returns on its investments, hedge funds may be content with 15-20%. In effect, that means a hedge fund can buy into a company at a higher price per share even if its target price of selling that share later may be the same as that set by a private equity fund.
Moreover, with the security of a robust initial public offering market missing, hedge funds’ appetite for late-stage, pre-IPO deals will also be on the wane.
“Hedge funds typically tend to invest in listed entities or companies in their pre-IPO stage, as their liquidity requirements are much higher. With the IPO window shut, their risk appetite for pre-IPO deals will now have come down dramatically,” said Arun Natarajan, founder and CEO of Venture Intelligence.
“In the listed space, however, competition between private equity funds and hedge funds will still be intense,” he added.
sanat_vallikappen@dnaindia.net
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