Contact Us

Attractive price & liquidity lure private equity firms to listed companies

Shailesh Menon, Mumbai, The Economic Times

September 09, 2011


Decline in stock valuations and easier exit options are driving private equity firms to buy companies in the listed space.

PE funds, which have the mandate to buy from the secondary market, are also strengthening their holdings in portfolio companies through open market purchases. Also, expectation of higher valuation among promoters of private companies is holding back PE funds from investing in unlisted companies, which is working in favour of listed firms, fund managers said.

During April-August, PE funds, including ChrysCapital, Beacon India, Sequoia Capital and General Atlantic, among others, bought shares worth more than $700 million through 20 open market deals, according to data from PE research firm Venture Intelligence.

"PE funds are trying to benefit from a falling market. The Indian market has come down due to global and non-fundamental reasons. PE funds are seeing this as a good opportunity to include some good stocks in their portfolios," said Mukul Gulati, MD, Zephyr Peacock India, a Bangalore-based PE firm.

Private equity players are going for private investment in public equity (PIPE) deals mostly in semilarge and mid-cap companies across sectors. In January-June, PEs bought shares worth $1.05 billion (around Rs 4,739 crore) through 27 PIPE deals compared with 16 deals worth $0.27 billion (around Rs 1,219 crore) a year ago.

ChrysCapital bought shares worth $38 million in Blackstonebacked Nagarjuna Construction in the past three months. It has now more than 7% in Nagarjuna, equity analysts said.

In another open market deal, Beacon India bought shares worth $3 million in Everest Kanto. Beacon holds a 2.7% stake in the cylinder manufacturing company as of June. General Atlantic's $65-million investment in IndusInd Bank and Sequoia Capital's $8-million investment in EssDee Aluminium are other noteworthy deals in the past two months.

"When compared with their investments in unlisted space, private equity funds keep shorter-investment horizon while investing in listed space. They usually invest in portfolio companies, but they are not averse to picking stakes in companies with good performance credentials and sound management," Gulati said.

Private equity funds investing in listed companies expect a 20-25% return on their investments, he said. The benchmark Sensex has fallen more than 17% so far this year. More than 1,900 stocks among 2,500 actively-traded securities are currently trading close (within Rs 50 per share range) to their historical low prices, according to ET Intelligence Group database.

Even index front-liners in marquee sectors such as banking, infrastructure, information technology and capital goods are trading at 15-20% lower than a year ago. "PE funds are finding good buying opportunities in listed space, thanks to fallen stock valuations.

By investing in listed stocks, PE funds are fairly insulated from price risk and liquidity risk," said Rahul Bhasin, MD, Baring Private Equity Partners. Promoters of private companies still demand higher valuations while selling stakes to private equity investors, he said.

Unlike in China, where private companies are valued at a 60-65% discount to listed companies, Indian private companies command almost the same valuations as that of an established listed company, he said.

"Price expectations are still high in unlisted space. PE funds, these days, prefer to have exposure to listed stocks as these are low-risk investments bearing higher returns," he said.

Difficulty in getting exits is also keeping private equity funds away from private unlisted companies. In the past nine months, 29 companies have raised Rs 5,423 crore through initial share sale compared with 35 issues worth Rs 12,605 crore a year ago.