With the current absenteeism of IPOs, private equity firms are having a tough time exiting their expensive and old portfolio firms. Secondary deals offer them a way out, but at what cost?
With the current absenteeism of initial public offerings, private equity firms are having a tough time exiting their expensive and old portfolio firms, leaving several firms with no option but to exit through secondary deals. Secondary deals are whereby companies are traded between private equity groups rather than outwardly in the open market.
The private equity industry changed in India and globally post the world economic crises in 2008. With the fall of financial institutions like Lehman Brothers and Bear Stearns, the valuations of companies also began to trickle down. This changed the game for PE investors who had earlier funded companies at valuations over 20 times. The value of some of these companies has reduced considerably, and coupled with the falling rupee, the exit valuations have gone down further.
Some of the large firms that have invested in listed companies in the pre-economic crises period have seen their value diminishing on the stock market. For example, PE firm 3i India Infrastructure had invested R900 crore in Adani Power in 2007. The company went for an IPO in 2009 with a price band of R90-100 but its stock value has halved to close at R47.45 on the Bombay Stock Exchange on Friday. “Who will give us the right price now if we exit the company? The investment cost us R60 and price is somewhere around R50 now,” says an official at private equity firm 3i Group.
However, the industry is divided on the viability of secondary deals. Some promoters say there are certain clauses between the primary investor and the promoters that bind them to follow the first right of refusal clause. “The outgoing investor has to offer equal number of shares to existing investors or at least offer a proposal to them,” says a senior official of a power firm that has received PE investments.
A few fund managers believe it is the best time for secondary exits but in specific sectors. “There is not always a clause between the promoter and the PE investors,” says Vishakha Mulye, managing director and chief executive officer of ICICI Venture Funds Management Co Ltd. “Sectors like healthcare and education see more secondary deals,” she adds. ICICI Venture has done a few secondary