The desert storm (read multi-billion dollar Dubai debt crisis) that has blown away some 1,000 points off the benchmark stock market index Sensex in a matter of 48 hours has brought forth a peculiar problem for private equity (PE) investors—How to get the timing right.
The shockwaves across Asian markets emanated from a restructuring plan announced by Dubai asking creditors of state-owned Dubai World and Nakheel, which developed the landmark palm-shaped islands in Dubai, to agree to a standstill on debt. Dubai World’s liabilities stood at $59 billion as of August.
Now, if the Black Friday continues on Indian bourses, it may perhaps change the way many deals are struck, both market-led as well as private equity-led.
PE funds, that shouted ‘we-told-you-so’ when the markets crashed beginning January 2008, remained cautious when the valuations more than halved by March 2009. And, PE transactions shrunk swiftly post February’08 and were just about showing signs of returning to normalcy.
But, the sharp rebounce since then had caught them off guard. If you didn’t see value in Indian market when index was at 8,500, can you justify investing at twice the value seven months down the line? After all, PE firms are different from foreign institutional investors.
Now, the mini correction in Dalal Street could once again provide an entry point. A possible fallout of the market crash would be the impact on primary market. If the markets continue to shrink from here on, it would delay PE-backed IPOs and could have an impact on pre-IPO transactions or whatever is left of it.
Moreover, it would also pose the question on PE exits. Many PE firms who had investments in public companies have been selling out through open market transactions over the last few months taking advantage of the markets upsurge. This could virtually stop, if valuations drop significantly from here.
VCCircle presents quick comments from experts to unravel the impact of the Dubai debt crisis on the sector and the economy.
Vikram Utamsingh, Head of Private Equity Advisory at KPMG India
People who are looking for PE transactions will not change their mind on valuations. It will depend on how much the markets falls over the next 10 days. This one bad news has come in and it remains to be seen how global markets react to it. One impact could be volatility in the markets. Also, investors who are undecided between a QIP and a private equity transaction, and exploring both at the same time. The option of QIP will become more uncertain because they will only go ahead if a certain price is maintained.
Volatility will always delay transactions. We should take cognizance of the fact that problems which the international world is facing on toxic assets, only a certain portion of those have been dealt with and there are potentially more to come. This is yet another example. When you are doing a transaction you have to take into account that there will be some sort of shocks that will be coming though. When these come through, they will impact Indian markets and could affect business performance.
Hetal Gandhi, MD of Tano India Advisors Pvt. Ltd
In our view, there will not be a great impact because it’s very unlikely that Indian banks and financial institutions have exposure to Dubai World. If this really becomes a big issue then it will have a lot of collateral impact on India. First, people were looking at the recovery with a lot of scepticism. This gives a significant boost to risk aversion.
You could see a massive flight of capital from emerging markets, a lot of which has come to India. Markets will fall, rupee will depreciate and dollar will appreciate. Second, Middle East is one of the places where you have maximum number of Indian immigrants, a lot of whom are in unskilled or semi skilled industries. Dubai is also a source of a lot of remittances. By and large, I don’t see this affecting India because there are no major investors and lenders from India into Dubai. India’s exports are also not that significant at around $20 billion, a lot of which is foodgrains.
It will cause a lot of nervousness in the short-term. There hasn’t been a lot of investing from Gulf in Indian private equity funds, and whatever is mainly Abu Dhabi. Will markets tank to 7,000, I would not put my bet on that as there are real earnings and growth in India. But, there is a strong possibility of a correction of 10%, maybe up to 20%. It could have a significant impact on the IPOs that were lined up. Another area is real estate, where there are a lot of relationships with the Middle-East.
Shweta Jalan, Director, Advent International
I think it’s a little early to assess the impact. I think in the short-to-medium term our exports to UAE, which stand at around $24 billion, could get impacted. Also we have to look out for how job losses in the UAE pan out for next 12-18 months. There was a large influx of Indian workers from India to UAE, and if they come back we need to see impact of employment on India. Industries exporting to UAE are likely to get affected in the short to medium term.
Intuitively one would have felt that beginning of this year will be a great time for private equity as capital markets were not an option. But that did not happen. Now, the markets have completely opened up and, in terms of deal flow, situation is much better as compared to 8-9 months ago. But valuations have also gone up. If it's a sustained period of around 12-18 months of dry spell then it will be good for private equity in terms of deal flow. Many business houses have raised funds recently and are in a comfortable position for some time to come.
Spicejet Not Aware of Any Change By Istithmar: Reuters
Spicejet said on Friday it was not aware of any change in investment strategy by Dubai World's Istithmar, which owns 13 percent of the low-cost carrier. Istithmar is an alternative investment house that is fully owned by Dubai World. Spicejet shares were down 4.3 percent at 45.20 rupees by 0950 GMT, having fallen as much as 7.7 percent earlier. The main Mumbai index was down 1.4 percent.
Anuj Puri, Chairman & Country Head, Jones Lang LaSalle Meghraj
There are two real estate markets to consider in this situation – the one in India and the one in Dubai. There are four factors involved in the Indian real estate market – demand, supply, finance and sentiments. At this stage, sentiments due to the collapse of real estate in Dubai are the most vulnerable and may get hit, while demand, supply and finance in India will remain untouched. It is conceivable that the RBI may take a cautious approach in terms of liquidity in the real estate sector, which would not be good news in light of the fact that FDI norms for Indian real estate are on the verge of being relaxed.
It was evident that Dubai’s real estate market was not long-term sustainable, since it was not driven by end user demand. For a long time now, a multitude of apartments there have been standing unsold, held largely by speculator/investors who had bought them to sell them at higher prices that never happened. The big question now is how many of these investors have the ability to service their mortgages.