Private equity (PE) investors in India have in the past found it easy to identify new businesses to buy, but difficult to sell their stakes when the time comes. But 2012 saw a revival in exits owing to a more upbeat stock market and secondary sales between investors as well.

Secondary sales

According to a report by PriceWaterhouseCoopers (PWC), 2012 saw PEs make exits of $4.2 billion in value terms through 98 deals, a huge jump of over $2.8 billion (80 deals) in 2011. This was on the back of a stock market (Sensex) that gained 25 per cent for the year.

While the first quarter of 2012 sprinted saw some notable exits, ambiguities around the general anti-avoidance rules (GAAR) led to a lull in the next few months, on lack of clarity about how offshore structures would be treated. However, as markets resumed the uptrend, exits revived, aided by a number of secondary sales.

The largest exit was Carlyle’s stake sale in the open market in Housing Development Finance Corp (HDFC), for nearly $1.1 billion doubling its investment made in 2007.

General Atlantic and Oak Hill Capital’s stake sale in Genpact for $1 billion to Bain Capital was the next largest exit in 2012. IT/ITeS and banking and financial services witnessed the maximum number of exits accounting for 23 per cent and 17 per cent of volume last year, respectively.

Secondary sales (to another strategic investor) emerged as the most preferred option, accounting for nearly 30 per cent of the total exit volume in the first nine months of 2012. This was followed by open market sales contributing 28 per cent. Challenging capital markets saw IPO exits limited to three deals during 2012.

Why exits are tougher

The domestic PE market which is a decade-old, started on the premise of a high growth and a strong “emerging India”.

Investments boomed during 2006-2008, and peaked to $14 billion in 2007, only to dive to $4 billion in 2009.

While deals slipped, valuations also flipped over, with average premium on deals slipping from 33 per cent in 2007 to 13 per cent in 2012, according to Bloomberg statistics. Market exuberance saw target multiples peak at 40 times net income (price-earnings multiple) before plunging to 13 times in 2009. While 2010-2011 saw revival, multiples have moderated to a more realistic 16 times in 2011-12.

Typically, PE funds invest over a period of five to seven years. Hence, investments made at high valuations during 2006-2008 will be maturing in the coming year.

However, the global financial crisis showed these expectations to be wide off the mark. This has made exits difficult and unprofitable, particularly benchmarked against Sensex.

Where are we headed?

Uncertainties in the global landscape and India’s slowing economy have led to fewer new PE deals last year.

According to a report by PWC, PE firms invested $8.85 billion (406 deals) in 2012, down 14.7 per cent against 2011. However, on the macro front, some of the policy reforms have managed to perk up investor sentiment.

The expectation of a rate cut and lower inflation this year may lead to momentum in the capital markets, which can give further exits a leg up.

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