Thoughtbytes – Private Equity

The announcement of Adlabs Imagica Intial Public Offer(IPO) comes after a long dry spell of issues in the Indian primary markets. Though it is a small $67 MM issue, it is significant for two reasons. First, it is the first major IPO following Just Dial’s May 2013 IPO and secondly, and more importantly, the IPO is an exit opportunity for a private equity (PE) player, ICICI Ventures.

The Indian PE sector has gone through a rough patch with no major deals reported since 2011 The period accounted for just about US$26 billion spread over 1394 deals with an average of a measly US$18.5 million a deal. The bigger worry for the industry is from the exit opportunities the venture capitalists or the private equity investors have got. There has been only about US$11.7 billion worth of exits in the same time frame from 306 deals; many of these may have actually eroded investor capital. In only 11 of these 306 deals have the exits been through the IPO route. These figures paint a story about the state of the industry.

Indian private equity industry, over the past few years, has accounted for just about 1% to 3% of deal value reported globally. A significant portion of the money that flows into this sector is from overseas investors. The political and economic uncertainty over this period only added to the industry’s woes. But for a sustained and vibrant PE industry to exist, a buoyant equity market is a prerequisite. Indian equities have stagnated in absolute terms for close to six years after the Nifty hit 6000 for the first time in early 2008. Very high levels of inflation coupled with the Rupee’s depreciation resulted also adversely impacted returns.

Equity under performance has resulted in a wide spread erosion in equity valuation. Listed blue chip stocks were available at attractive valuations and in most cases at better valuations than what some of the prominent PE investments, which were predominantly in midcaps, had taken place at. This curtailed exit opportunities and the PE firms have also been reluctant to part with their investments at unattractive valuations.

The past few weeks of market have brought some cheer to the VC and PE firms. The market has reacted very strongly to the clear election mandate. The markets are likely to continue their upward march over the next few weeks news on government formation, the first budget (not to forget all the GST talk surrounding the budget), and business-friendly policy decisions, flow in. This will spike valuations in the secondary market and most of the low hanging fruits are likely to be plucked. Consequently the hunger for new issues is likely to surface leading to some quick exits, especially long pending ones, and Indian IPO calendar may start looking much fuller than what it is now.

The biggest beneficiaries, needless to say, would be the Indian promoters. Successful exits will kick off a virtuous cycle and, over the next few years India will hopefully be able to soak up a bigger portion of global PE funding and in the process contribute to a few basis points of uptick to the Indian GDP figure.

Harish Sridharan
PGPX (One Year Full Time Programme for Executives)
Class of 2015
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