Three out of four private equity-backed Indian companies which went public over the past three years are trading in the red on the stock exchange, according to a VCCircle study. This is around the same ratio of firms which have given negative returns since listing, among the entire set of companies who floated their public issues during the period. This effectively implies that an added level of vetting from an institutional investor may not be enough to cover your money when market sentiments are poor.

“The presence of a financial investor such as a PE fund gives a high level of comfort in terms of transparency and corporate governance practices. But while investing in an IPO of a PE-backed company, an investor should evaluate the investment in terms of pricing and markets,” says Ravi Sardana, senior vice-president at ICICI Securities.

Among the prominent names currently trading below their issue price are ChrysCapital and Morgan Stanley-backed cable network major Hathway Cable & Datacom, Bessemer Venture Capital and Olympus Capital-backed renewable energy firm Orient Green Power Company and Trinity Capital and IL&FS Investment Managers-backed DB Realty, besides Beacon India PE and India Equity Partners-backed diversified infrastructure player A2Z Maintenance & Engineering Services Ltd.

The study included pre-IPO bets by PE firms, as well as other institutional investors such as ad-for-equity media firms, and prominent private investors like Rakesh Jhunjhunwala and Shivanand Mankekar.

There have been around 50-odd PE-backed firms which floated their initial public offers since the collapse of Lehman Brothers in September 2008. But only about a dozen of them are afloat at present.

This need not imply that the PE firms’ own investments have gone under as in many cases, they did invest years before the IPO and would be sitting on unrealised gains.

Close to one-third of the PE-backed firms have lost half or more of their value since listing, with DB Realty, Den Networks, SKS Microfinance, Commercial Engineers & Body Builders Co Ltd (Cebbco), Thinksoft and Vascon among the worst performers.

Indeed, the stock market has had a tumultuous three-year period bottoming out in March 2009, only to bounce back strongly over 2009-10 and then to be battered again by global headwinds for much of 2011.

However, the bigger universe of other non-PE-backed firms which listed during the same period had a similar performance, with 75 per cent of the firms trading below issue price. This goes on to show that in many cases, PE-backed firms went ahead with aggressive valuations riding on the stock market bounce back.

“In many cases, PE fund managers desire to part-exit after a brutal drubbing in investment values during the downturn and that would force their portfolio firms to go public, riding the bullish market sentiments. But it only heaped past mistakes of PE investors onto the stock investors,” said an investment banker who requested anonymity.

“Beauty parades of I-bankers for IPO happen in the PE funds’ offices in such firms, instead of the companies going public. And that tells you a lot about how such issues get priced.”

Ironically, Jubilant Foodworks, the biggest performer among the PE-backed firms, opted for IPO as it was necessitated by the exit call of its financial backers – JP Morgan and India Private Equity Fund (IPEF), a joint venture between Chase Capital Partners and Oppenheimer.

These two investors are estimated to have made 4x returns on their decade-old investment, clearly dwarfed by the almost 6x jump in stock value in the past year-and-half since the listing. And these two PE firms, reportedly, could not find any buyer for their combined stake of over 30 per cent.

This effectively shows that the PE firms not only made some poor investment decisions, but also missed out on lucrative growth stories. Jubilant Foodworks, which has the India franchise for Domino’s Pizza, is currently valued at $1.2 billion as against the market cap of $1.6 billion of Domino’s Pizza Inc.

However, another bunch of firms, which have PE firms as pre-IPO investors or picking shares during the public issue, are still in the green, even as the stock market has been volatile. These include names such as Subhkam Ventures-backed media and entertainment firm Midvalley Entertainment Ltd, Sequoia-backed Lovable Lingerie and Axis Bank-backed Mandhana Industries.

To be fair, market prices need not necessarily be the best reflection of a company as stock markets do tend to reward some more than others. Therefore, a firm, whose scrip has rocketed above the issue price, may yet be pegging on a higher valuation than what its earnings and short-medium term earning potential will mandate. On the other hand, some stocks might have crashed due to change in regulatory stance or external factors, such as firms like SKS Microfinance and DB Realty.

But the market is an indicator of broader trends. The big picture is that investing in primary market is, after all, a high-risk game. 

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