PEs find exit harder as craving for floats dips

For others of their ilk, though, this spells an opportunity

MUMBAI: The lull in initial public offerings (IPOs) presents opportunities galore for private equity funds, which seem to have become the first port of call for companies in urgent need of capital.

Ironically, this very lull has also become a bane of sorts for some funds, which are already invested.

Some private equity funds that had invested into companies in the past, and may have planned an exit now, have had to defer their plans as investor appetite is at its nadir.

Notably, exits for a private equity investor are primarily through IPOs, rather than mergers, acquisitions or strategic sales.

“There are companies in our portfolio, which may have been ripe for IPOs had the market sentiment been positive,” says K Srinivas, managing partner at BTS Investment Advisors, which has been investing in Indian small and medium enterprises since 1997.

These include Hyderabad-based port-management company Ocean Sparkle, in which India Equity Partners also has a stake, and Mumbai-based Arch Pharmalabs, in which ICICI Venture is the other strategic investor.

“If the market had been good, it would have speeded up the momentum for these companies to go public,” explains Srinivas.

Baring Private Equity Asia’s Jimmy Mahtani says some of their investee companies, which were fairly close to the IPO stage, have also had to put off these plans. “We will wait for the markets to stabilise before finalising plans for them,” he said without naming the companies.

Some companies with private equity investment have even had to put IPO plans on hold after filing offer documents with the Securities and Exchange Board of India.

These include Virgo Engineers, in which Tano India Private Equity has invested; Apollo Health Street, in which One Equity Partners and Temasek hold a stake; and NuTek India, in which Balyasny is an investor.

Among others with private investors, Pipavav Shipyard, Ramky Infrastructure and Reliance Infratel have also had to put off their listing plans.

“This is part of the lifecycle of any private equity venture capital firm. When the markets are down, exits typically get delayed,” said Niren Shah, managing partner of Norwest Venture Partners. His investee company, Persistent Systems, has also had to put its IPO plans on hold.

It is not necessary that all private equity players cash out at the time of the IPO or soon thereafter. Many of the above investments are pre-IPO placements, which typically mean the investor has to remain locked in for one year from the date of listing.

But, even those without this commitment of a year sometimes like to remain invested in the company, and may want to sell only when they deem it appropriate.

All the same, the earlier a private equity investor is able to take its investee companies to the market, the higher the probability of it making an early exit.

Meanwhile, thanks to the break the IPO market is taking, private equity players are finding it easier to enter companies.

Among others, Baring Private Equity Asia, which has just closed its $1.5 billion fourth fund for Asia (around half of which will be invested in India) has picked up a 30% stake in Rithwik Projects. The company had filed its draft red herring prospectus with Sebi in September 2007, but was unable to hit the market as a result of the downturn that began January 2008.

“We have been able to convince the company to build scale before it goes public,” Jean Eric Salata, chief executive officer and founder of Baring Private Equity Asia said, adding, Rithwik’s IPO is now 2-3 years away.

sanat_vallikappen@dnaindia.net