The year 2012 has been challenging for the private equity (PE) industry in India. The domestic and global macro-economic environment, coupled with various industry-specific challenges, has created an environment of uncertainty for PE funds. PE fund managers have become increasingly selective and cautious in indentifying opportunities for investment to protect capital and improve returns. This has lead to a 25 percent decline in PE investments, from USD 8.4 billion across 370 deals in the first nine months of 2011 to USD 6.2 billion across 320 deals in the corresponding period in 20121.
Concerns on the India growth story and a slowdown in GDP growth has lead to heightened scrutiny by limited partners (LPs) who have intensified their diligence processes before backing new funds and while evaluating re-ups. LPs are also increasingly concerned with the overhang of unrealized investments and the unproven track record of many fund managers, as several funds are coming to the end of their fund life. This has created urgency among many PE fund managers to revisit their exit strategies and also evaluate alternative modes of exit, as initial public offerings (IPOs) are still looking difficult in the near term. In this article, we analyze the PE exits that have taken place in 2012.
Increase in exit volume but decline in exit value
The volume of exits increased marginally during 2012 as compared to the previous year. PE funds managed 71 exits in the first nine months of 2012 as compared to 65 exits during the same period in 20112. However, exit value declined substantially to USD 1.1 billion from USD 1.8 billion in the same period a year ago.2 It seems that although PE funds have managed to generate liquidity events, the average size of the exit has declined perhaps due to the tough capital market environment.
Secondary sales emerged as preferred exit type
Among the various types of exits, secondary sales emerged as the preferred option in 2012, constituting nearly 30 percent of the total exit volume in the first nine months of 2012, as compared to 18 percent in the previous year3, 4. The rise in such deals is reflective of a maturing PE industry in India. Portfolio companies that previously had a PE investor on board are likely to have in place adequate systems and processes along with an improved level of corporate governance. Secondary sales are also beneficial for sellers, serving as a viable exit option when the primary market is not conducive for an IPO exit.
Open market sales contributed 28 percent of the total exit volume, followed by strategic sales that contributed 25 percent and buybacks accounted for 14 percent 3, 4. Due to challenging capital market conditions, IPO’s accounted for only 3 percent of the year’s total exit volume 3, 4.
In terms of exit value, public market sales contributed 85 percent of total exit value in 2012, followed by secondary sales, which accounted for 10 percent. Other exit types contributed the rest of the exit value of USD 1.1 billion 3, 4.
Maximum exits in IT/ITeS and BFSI
IT/ITeS and BFSI saw the maximum number of exits accounting for 23 percent and 18 percent of the total exit volume respectively3, 4. Exit volumes in IT/ITeS were lead by e-commerce and internet companies, the majority through strategic sales. For instance, Intel Capital sold its entire stake in Wortal Technologies - which owns and operates events and entertainment portal Buzzintown.com to Yatra Online, in January 20124. Similarly, Accel India, Tiger Global and Helion Ventures sold their entire 48 percent stake in eTree Marketing which owns and operates online retail store Letsbuy.com to Flipkart in February 20124.
Some interesting exits in 2012
Warburg Pincus sold its entire stake in Kotak Mahindra Bank through the open market in two tranches in February 2012 and March 2012 for USD 460 million5. The fund initially acquired a 3 percent stake in the company in December 2004 and subsequently raised its stake in the company through bulk purchases to about 9 percent. This has been one of the largest exits of 20125.
In another large open market exit, Carlyle sold a partial stake in HDFC through multiple deals over the exchange for USD 273 million. Carlyle initially acquired a 5.7 percent stake in the company through a preferential allotment in July 20075,6.
The largest exit through the secondary route this year has been ICICI Ventures stake sale in Sahyadri Hospitals to IDFC Alternatives at an estimated value of USD 25 million5. Other secondary transactions included, Evolvence India Life Sciences Fund’s sale of its 20 percent stake in medical device-manufacturing company Sutures India to CX Partners for about USD 20.6 million and Actis India’s partial divestiture of its stake in Sandhar Technologies to GTI Group for about USD 21 million5.
The year has also seen the IPO of Multi Commodity Exchange (MCX), India’s first commodity exchange to be listed on the stock exchanges in March 2012, providing an exit to GLG Financials, which sold part of its stake for about USD 16.5 million5.
Returns from exits in 2012
The measure of an investment’s success and the most important aspect of the PE investment cycle is managing the exit process effectively and successfully exiting the portfolio company with healthy returns. Our analysis of a sample of realized exits in 2012 reveals that PE funds have earned a gross capital weighted internal rate of return (IRR) of about 17 percent and a median IRR of 12.5 percent on their dollar investments6. The average holding period of such exits has been close to five years, and these exits have delivered a cash multiple of 2.9 times the invested capital6. The exits in our sample have significantly outperformed the public market index (BSE Sensex) which would have returned only 9 percent if the equivalent cash flow of the PE investment was invested in the public market 6, 7.
The exit environment may improve over the next 12 months. The Bombay Stock Exchange benchmark index (BSE Sensex) has returned close to 21 percent in the first nine months of 2012 indicating a turnaround in investor sentiment and improving valuations6, 7. The momentum that capital markets have witnessed recently is likely to increase the exit options available to PE funds. The deferment of General Anti Avoidance Rules and the finalization of Alternative Investment Funds Regulations by the SEBI have also lent much needed clarity for PE investors, who can now plan on exits and better manage their tax risks. At a macro level, expectations of moderation in inflation, along with rate cuts by the central bank, is also expected to help improve the exit environment. The Government of India’s recent push on reforms and its seemingly serious intent to curtail the fiscal deficit will likely help strengthen swaying confidence in the Indian economy. It is likely that the combined effect of these factors will be positive for the PE industry and also present more new exit opportunities.
1. Venture Intelligence, Data does not include real estate deals
2. Venture Intelligence, KPMG in India analysis. Exit value has been adjusted for PE investors share wherever applicable
3. KPMG in India analysis
4. Venture Intelligence
5. Venture Intelligence
6. KPMG in India analysis
7. Bombay Stock Exchange