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PE Funds: Exits, The Only Measure Of Value

| 3/21/2013 9:00 PM Thursday

Private Equity has been a catchphrase in India for the last 10 years and has played a critical role in creating value for investee companies. However, due to a lack of good exit opportunities with the drying up of IPOs and stalled M&A activities, investments by PE Funds have dropped significantly in the recent past. Sumeet Mehta, Managing Director, Paradigm Advisors tells us about the challenges PE Funds will need to tackle to revive themselves, like deploying uninvested capital, asset management and multiple exit routes.

When capital markets participants hear about Private Equity (PE) and value creation for PE Funds in listed companies, the first thing that flashes across their minds is Warburg Pincus having exited Bharti in March 2005. This exit happened through open market sales in two block deals totalling 112 million equity shares. This represented 6.04 per cent of the equity capital of the company valued at Rs 24.67 billion. Warburg had invested USD 288 million in five stages of fund raising between September 1999 to July 2001 in Bharti. Between February 2002 and October 2005, it exited Bharti in five deals aggregating to USD 2 billion. This was one of the biggest success stories in value creation by PE Funds in India.

Private equity has been a buzzword ever since it picked up pace in 2004. In the recent past, the markets have witnessed many IPOs of companies backed by PE Funds and open market sales by PE Funds. PE Funds have been a critical catalyst in creating value in their investee companies.

Exhibit 1 gives a quick snapshot of investments by PE investors in India, showing that PE Funds have invested around USD 83 billion in 3539 deals since 1999.

Exhibit 1: PE Investments in India

Year Investment (USD Bn) Deals (No.)
1999 0.50 107
2000 1.16 280
2001 0.94 110
2002 0.59 78
2003 0.47 56
2004 1.74 90
2005 2.60 185
2006 7.40 296
2007 17.10 494
2008 14.10 448
2009 4.50 216
2010 9.50 380
2011 14.80 531
2012 7.60 268
Source: Industry and Media Reports

However, it has been observed that investments by PE Funds have dropped significantly in 2012 after it bounced back in 2010. This can be attributed to falling investor confidence and interest in India funds. Lack of investor interest resulted in India funds raising a meagre USD 2.5 billion in 2010 and USD 2 billion each in 2011 and 2012. Also, the money available for investing in India fell from USD 25 billion in 2010 to USD 17 billion in late 2012. This is a critical indicator of falling investor interest in and allocation for India.

This is mainly due to the lack of good exits and quantifiable performance by India funds and lesser liquidity chasing the emerging markets in general and India in particular. The only measure and yardstick of value creation by PE Funds Investment is exits. No wonder then, that while investments are news, exits are much bigger news. As is evident from Exhibit 2, PE Funds in India have managed to book exits of USD 23 billion in 840 transactions since 2005.

 

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