With $5b stuck in vintage deals, PE players go slow

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Private equity funds that got trapped in deals of 2006 and 2007 vintage are still struggling to make an exit. Over $5 billion worth of their investments are stuck in infrastructure, manufacturing, construction and real estate. Even where the deals are happening even now — around $3 billion in the first nine months of calendar 2013 — the value and volume have shrunk by half from last year’s levels.

Amit Chander, partner in Baring Private Equity, told Financial Chronicle: “The vintage deals are still at least 18 to 24 months away from fruition in the three sectors which have been mired due to various policy and regulatory issues,” said Chander.

However, industry officials hope deals will happen for companies which believe in cycles and let the process of entry, growth and exits to complete, with cycles taking at least two to three years to complete.

“It is very important that promoters realise that there is a cycle and stick to it. Besides, the right valuation and timing are very important for a good exit. We managed to double our $650 million investment in HDFC when we exited at $1.2 billion last year,” said Devinjit Singh, MD of Carlyle India.

The market has risen since 2011 and lots of PE companies have exited their positions. The emphasis is on the right time and right valuation as it is believed that the Indian market is now educated enough and there is a clear flight of capital from the market.

Sandeep Naik, MD of General Atlantic India that exited Genpact, Patni Computers and Hexaware Technologies in the past year, doubling the returns on these investments, believes, “The hubris has settled down and the emergence of healthy investment climate is good for the sector. At one point 250 deals were running around for exits due to wrong investments and assumptions of higher returns after the market tanked. It has to be a patient investment. Identifying the entrepreneurs, understanding the cycle and entry is very important. Companies have to be sensitive to the demands of the promoters of the invested company as well,” said Naik.

With the failure of the IPO market to provide investors opportunities to exit, PE funds are forced to look at alternative exit routes like secondary market sale, buybacks, strategic sale and public market. However, the slowdown and poor valuations have reduced the volumes and value of exits in these routes.

According to Sanjeev Krishnan, executive director of PwC India, the preferred mode of exit in the third quarter of calendar 2013 was buyback. Five such exits took place. The other modes were public market and secondary market sale (four exits each), and strategic sale and Initial Public Offering (two each).

After a spurt in the previous quarters, IPO exits in this quarter were worth a meagre $6 million. The IT and ITeS sector tops the list of PE exits in terms of both value and volume, with five deals worth $242 million.

This constitutes 50 per cent of the total deal exit value. However, compared with the preceding quarter, the exits in this sector have more than halved to $242 million from $579 million in third quarter.

The story remains the same even when compared against the same period last year. In the third quarter of calendar 2012 the exits were worth $1.05 billion from six deals.

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