PE Exits At An All-time High

June 2017 was a notable month for India’s home-grown private equity biggie ChrysCapital for more reasons than one. It made headlines twice over for walking away with bountiful harvests from two of its portfolio companies, in what could be termed as ‘bumper exits’ in the parlance of financial investments.

The private equity behemoth made around seven times return on Eris Lifesciences, an Ahmedabad-based pharmaceuticals company that made a debut on the bourses in the middle of the calendar year. ChrysCapital had invested around Rs 200 crore in Eris in 2011 in lieu of a 16.25 per cent stake.

“Exits have picked up in the industry and a vibrant IPO market has been instrumental in this,” says Gaurav Ahuja, Managing Director of ChrysCapital Advisors LLP. The firm has over $3 billion assets under management. “ChrysCapital took Eris public in June. The Eris IPO achieved two landmarks — it was the largest pharma IPO in India and the largest exit by a single private equity investor through IPO,” adds Ahuja.

ChrysCapital also made a partial exit from non-banking financial company AU Small Finance Bank, earlier known as Au Financiers (India), raking in seven times return on the investment it made in the company in 2013. Other investors who made partial exits from the IPO of the Jaipur-based company include Warburg Pincus, IFC (the private-sector arm of the World Bank) and Kedaara Capital. They all had invested in AU Small Finance Bank between 2010 and 2014.

These fund managers are not the only ones to be rolling in moolah. More recently, in October, Godrej Industries’ agri-business subsidiary Godrej Agrovet went public, helping Temasek Holdings make a partial exit. The Singapore state investment firm had invested Rs 572 crore in Godrej Agrovet in December 2012.

Even as the macro environment remains subdued in the country, an uptick in the primary market has paved the exit route for the entire risk capital industry, giving hope to even those players who have been waiting in the wings to make a strong come back.

Take Fairwinds Private Equity (earlier known as Reliance Private Equity) for instance. It is a good example of a private equity firm springing back to life on the back of a good exit environment in the recent months. The Anil Dhirubhai Ambani Group (ADAG)-promoted private equity firm started investing in 2010 and had no exits to show until 2016. But in 2016 and 2017, it made four successful exits: Shankara Building Products (via IPO and secondary sale with a 4.86x returns); Amber Enterprises (secondary sale; with 1.53x returns); Khadim India (via IPO; 4.88x returns); and Pathways World School (via buyback by promoters; return data unavailable).

According to research firm Venture Intelligence, fund managers have already recorded 213 exits worth $9,978 million so far this calendar year, making 2017 a bumper year for private equity/venture capital exits. Between January and October 2016, the total number of private equity/venture capital exits stood at 198 with the total value amounting to $7,373 million. During the said months in 2015, as many as 240 private equity/venture capital exits took place worth $9,098 million.  


That’s not all. The industry, this year, has also witnessed the highest number of private equity-backed IPOs, some of which were blockbusters. Sample this: As many as 17 companies launched their IPOs between January and October 2017 worth $1,040 million, recording close to a 25 per cent jump from the corresponding period last year when 14 companies went public. In 2015, a total of 13 companies had raised $435 million.

“IPOs are traditionally the best source of exits for private equity investors. A strong revival in the primary market, coupled with a buoyant secondary market, has catalysed a slew of healthy exits through the public market route this year,” says Arun Natarajan, founder of  Venture Intelligence. “Given the large pipeline of PE-VC investments that have matured — right from 2007-08 — this positive trend will encourage several more such exits,” he adds.

Both primary and capital markets have performed remarkably well in 2017, with capital raised from the primary market at an all-time high (Rs 65,000 crore so far in 2017 as per estimates available with Religare Securities), backed by the record-breaking run witnessed in the Indian stock market (up 26 per cent in 2017 so far).

In comparison, the secondary market performance has been a welcome relief for investors after two years of flat performance (-1 per cent from 2015 to 2016). On the primary market front, however, from about Rs 13,500 crore raised in 2015 to approximately Rs 26,000 crore in 2016, “to the all-time high fund raising done in 2017, there has been considerable increase in investor appetite for IPOs,” says Hitesh Agrawal, Executive Vice-President and Head (retail research) at Religare Securities.

Echoing the sentiment, Nitish Poddar, partner and national leader of Private Equity at KPMG India, says, “The IPO activity gained pace this year and emerged as a clear choice of exit route for large investments.” He, however, adds that the initial few months of 2017 saw muted exits as everyone was waiting and watching the impact of demonetisation and GST. “Once GST was announced and demonetisation interruption was stabilised, general investor confidence increased significantly as is witnessed by the increase in market indices and the number of new IPOs that have been successfully launched.”

According to another school of thought, there is a growing desperation among fund managers to cash out from their portfolio companies. While established investors and entrepreneurs are well in line as far as their growth trajectory is concerned, there are others who are refusing to wait any longer amidst uncertainty in the deal environment on account of economic reforms including the GST.

“First, it was demonetisation that left small businesses in a lurch. Then, the GST gave rise to enormous confusion about the new tax regime,” says a Managing Partner of a boutique private equity firm, on condition of anonymity. This, the person says, has made the investor community rather cautious and desperate, scouting for exit routes.

Besides, year 2015 that witnessed capital infusion in hordes has been an eye opener for fund managers. While the year saw some great ideas in the burgeoning e-commerce sector with increased investor interest, the shakeout within the industry in no time prompted several entrepreneurs to shut shop. Currently, there is mammoth pressure from the limited partners (the main source of money for private equity and venture capital firms) on investors to exit.

Typically, a single private equity/venture capital investment cycle lasts for about three to four years. After which, PE firms normally exit by way of trade sale, public listing, recapitalisation and secondary sale. Trade sale is the most common exit  method for private equity investments as trade buyers from the same industry are often more likely to realise synergies with the business and are therefore, the most natural buyers of the business. Typically, public listing takes place during positive market conditions. Venture capital investment cycles generally last five to seven years.

In terms of secondary sales, SAIF Partners stole the show when it raked in a 26.5 times return from its high-profile investment in One97 Communications, the parent of digital payments leader Paytm,  by selling its existing stake to Japanese Internet and telecom conglomerate Softbank.

“Going forward, strategic sales too will see a systemic upturn over the coming year as the buyout model becomes increasingly more popular in India,” says Yogesh Singh, partner at Trilegal, a law firm with a pan India presence. “Strategic sales continue to be a preferred mode of exit for PE firms holding a majority stake in a portfolio company,” he adds.

While exits have started picking up in the country over the past few years, India has always been a difficult market as far as generation of high returns across portfolios is concerned. The reasons behind this are varied, explains Singh. The lack of ability to take leverage to drive returns, currency risk, a complex legal enforcement system are some of the factors that result in fewer exit options for investors. Despite this, some private equity firms have done significantly well by partnering with entrepreneurs they trust, building genuine sector expertise so as to truly partner with the promoters rather than simply being the sources of capital, among others.

Road Ahead
If the current stage is, in anyway, a precursor to the months to come, the joy ride for fund managers is expected to continue. And it is not restricted to the exit market alone. “With exits going up, new investments also get a boost,” says Rituraj Sinha, Chief Operating Officer at security services company SIS that went public in August this year.

“We had two options in front of us. We could raise a fresh round of funding from either another investor or the stock market. We chose the latter as the time was just ripe,” he adds. While SIS paved the way for a partial exit for its investor CX Partners through the IPO, it has already seen a full cycle of investment and exit in the past as well. SIS raised its first round of funding from global private equity major DE Shaw way back in 2008 (it was the first private equity funding in the sector), which exited the company in 2013 by selling its entire stake to CX Partners.

So far, in the first nine months of the calendar year, private equity firms have hit an all-time high in terms of new investments. They pumped in about $17.6 billion in Indian companies, sailing past the previous high of $17.3 billion recorded in the 2015 calendar year.

“Going forward, considering that the corporate earnings growth and the Indian economic activity are at a trough, the expected revival on both these fronts should keep the primary and capital market upbeat in 2018 as well,” says Agrawal of Religare Securities. After all, investor sentiments are quite bullish, and the flow of funds into equities as an asset class is going strong. This is being driven in part by the government’s clampdown on black money and its efforts towards formalisation of the Indian economy.

Besides, the recent upgrade in India’s rating by Moody’s comes as a major boost to market sentiment, especially at a time when all eyes are on India’s growth that has come a long way down to report a 5.7 per cent gross domestic product (GDP) for the quarter ended June 2017 from over nine per cent growth registered for the quarter ended March 2016.

“The sovereign upgrade will enable lower cost of borrowing in international markets for Indian businesses and attract more foreign fund flows into India,” says Chandrajit Banerjee, Director General at the Confederation of Indian Industry. It is, of course, a sentiment booster for investors who have either invested in India or are looking at investing in the future.

In the end, as the saying goes, all’s well that ends well, and investors for now are a happy lot.