A long queue for the exit!

A long queue for the exit!

This report, prepared by Avalon Consulting, based on analysis of data from Venture Intelligence and inputs from industry participants, analyses PE exits from 1999 to 2014, and predicts the way forward


Private equity investments in India have seen three five-year periods since 1999, each unique in their environment and the level of investments, which touched around Rs. 62,000 crore in 2007, when India’s growth story was at its highest pitch.  Between 1999 and 2003, there was a cautious entry by investors which was characterised by growing interest in Asia following the China growth story and ASEAN meltdown. From 2004 to 2009, there was a bullish outlook and between 2010 and 2013 there has been a selective play.  Through this report, we get an overview of the private equity and venture capital investment and exit scenario in India.

Most of these investments have been raised outside India, in foreign currency, due to tax advantages. Hence, their exit returns have to overcome the natural hurdle posed by depreciation in the value of Rupee, which has been substantial in recent years.

Over Rs. 88,000 crore of the invested capital has managed exits from 2004, with reasonably good internal rate of return (IRRs) till 2008. For instance, Patni Computer Systems IPO in 2004 gave an IRR of 106 per cent to its investors while the Suzlon deal in 2005 gave an IRR of 306 per cent. From 2009, exits have increased but IRRs have plummeted in recent times.

The overall scenario masks two distinct phases of exits in the past and portends a third and most difficult phase from 2014 onwards. They are, the “India Shining” phase from 2004 to 2009; “Melting Pot” phase from 2010 to 2013, and the “Looming Logjam” phase from 2014 onwards.

India Shining phase: A dream run for PE exits, this phase witnessed around Rs. 32,000 crore of invested capital being exited. A large share of these exits were made in less than three years, at attractive IRRs, irrespective of the years invested. Most of these exits were through the Primary Market or IPO, on the back of a high share of private investment in public equity (PIPE) deals and the bull-run in the stock markets. Even through secondary sale, the IRRs of these exits were attractive (30 per cent to 60 per cent). However, the IRR on IPOs eased after the stock market bull-run ended in 2008. In this phase, IT/ITES, BFSI and Energy were the key sectors which had exits; these sectors also delivered high IRR on investments across many years in this period

The Melting Pot phase: Around Rs. 53,000 crore of invested capital exited in this phase. However, most of these exits were in the normative four to five years, at more sober IRRs (20 per cent being exceptions only in a few deals with less than two year exits). A larger share of these exits were through the Primary Market, though Buy Backs were also more prominent in this period. Given the volatility in the stock markets, the share of PIPE deals continued to be low. However, most of the PMS of longer periods delivered low IRRs. Buy backs also reflected a poor performance, while secondary transactions for longer holding period deals performed credibly. In the “Melting Pot” phase, the prominence of IT/ITES exits was low, while sectors like BFSI gained share and delivered high IRRs. The other sectors underperformed.

Exits are about to enter into a third and more challenging phase – the “Looming Logjam” phase from 2014 onwards – There are over Rs. 85,000 crore of invested capital, of over six years, waiting to exit. This nearly equals to 10 years’ exits, and five times the total quantum exited in any year in the recent past. A large share of the invested capital waiting to exit is in non-PIPE transactions, most likely requiring a secondary sale to exit. These investments are spread across a number of sectors with IT/ITES, Energy, Media, BFSI and Manufacturing having to perform well for the exit scenario to improve. Given the state of the economy and the impending uncertainty, the prospects for most of these sectors in the future look weaker than in the past. Despite unfavourable macro-economic conditions, there have been several successful exits creating substantial value. This will call for active involvement with the management. Successful recent examples (Servals Manufacturing, Justdial and Bookmyshow) also indicate that longer holding period can result in exceptional returns if the time is spent productively in value creation

This report recommends investors to adopt a five-step framework to drive value enhancement: Stay focused on delivering a growth strategy; create alignment – promoters and next stage buyers; transform governance and organisation; improve operational efficiencies and stress test.

Source: Venture Intelligence, a division of TSJ Media Pvt. Ltd., is the leading source of information on private company financials, transactions and valuations in India. For more information, please visit https://www.ventureintelligence.in

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