Value expectations, business performance hurting PE exits

Exits are on top of the agenda of Indian private equity firms as the industry suffers from macro issues like slowing economy and weakening currency besides weak capital markets, the main source for exits.

In this scenario, open market transactions besides a few stray M&A deals and secondaries, deals where one PE firm buys stake in a company from another fund, have provided liquidity to PE investors. The share of secondaries as an exit mode has been rising over the last two years and in 2013 it matched M&As with 21 per cent share each of the total exit value reported by PE firms in the country.

Capital markets still accounted for lion’s share with 39 per cent, followed by buybacks at 15 per cent and IPO at 4 per cent. While capital markets were a major source of exits, the PE industry has started adjust to new realities but maybe not quick enough.

To make a successful exit it needs to be planned right from the time of investment, said investors at the VCCircle Private Equity Exits Conference 2014.

Darshika Kothari, Partner at law firm AZB Partners, said the Indian private equity is stuck in a Hotel California situation, where "you can check out anytime you like, but you can never leave".

Kothari moderated the first panel of the conference titled 'Where Are Indian Private Equity Exits Stuck?' which also included speakers like Apax Partners' Shashank Singh; Shomik Mukherjee, Partner at Actis Advisers and Vikram Nirula, Partner at India Value Fund.

"We need to look at ourselves from a critical eye as we have left ourselves very limited powers to extract the value created," said Apax's Singh.

According to Actis' Mukherjee, there are several issues due to which the exit value and volume remain low.

"The first hurdle is expectation around value, a lot of people haven't re- calibrated value expectations. Another is alignment with partners (on the exit method) and third is business performance as many companies haven't performed well," he said.

Also while several firms are looking to list their unlisted portfolio companies overseas, it comes with its own set of caveats.

According PwC's executive director Gautam Mehra, they include remitting of funds not used within 15 days; limited end use like retiring overseas debt or fund acquisitions abroad and listing allowed only on exchanges in specified jurisdictions.

So how does one build a platform for a successful exit?

First is that investors need to reassess the sell vs hold proposition for investment periodically. Investors also need to realise that they cannot sell an investment at exact peak and have to leave some money at the table. Also there is an increasing bias towards investments with significant minority and control.

"It took almost four years of activity track around investors relations like increasing analyst coverage from 3 to 17, help promoters start engaging with long-only funds and do road-shows (to build liquidity in Apollo Hospitals’ shares). So by the time we were ready for exit there was enough appetite and we were able to make a $400 million exit in six months without impacting the share price," said Singh of Apax.

Also it helps if you have a road map for exit with clear triggers at the time of investment.

"In Paras Pharmaceuticals (where Actis sold stake to Reckitt Benckiser), the triggers were to increase distribution, build brand architecture and launch new products," said Mukherjee.

Investors should start engaging with possible buyers of their stake also in advance.  "We have a team working on strategic exits which needs to identify five likely buyers at the time of investment. Also, to complete M&A transactions it takes time, and starting early is necessary," said Nirula of India Value Fund.

Mukherjee added that Actis met with Reckitt Benckiser Group two years before selling Paras to them for $724 million.

(Edited by Joby Puthuparampil Johnson)

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