When the Private Equity (PE) funds invest in companies, they always have an exit plan generally 5 to 7 years after the entry. But the actual exit and the return on investment depend on a variety of factors like performance of the invested company, the overall situation of the economy and, above all, the state of the IPO (Initial Public Offer) market.
In India, the present market conditions appear to be conducive for exit as stock indices at the Bombay stock Exchange (BSE) and National Stock Exchanges have shot through the roof. According to a report in Business Standard, four PE investors are soon going to exit Justdial Ltd which has planned for a Rs 950 crore IPO. With market sentiments looking up, PE funds expect the IPO market will continue to be strong, offering opportunity to exit. In Justdial, PE funds together had invested $57 million which will fetch a return of 8 to 12 times at the proposed IPO price.
While the future look good, the overall size of IPOs that were floated by the PE-backed companies has fallen by 70 per cent in the last three years. According to the data from VCCEdge, the year 2010 witnessed 28 PE-backed IPOs worth $2.6 billion. In 2011 the figure dropped to $1.3 from 20 IPOs and 2012 it dropped further to $778 million from only five offers, wrote Business Standard. Whereas in 2013, till date, five IPOs have been floated by PE-backed companies raising about $126 million. The E industry analysts also believe that in 2013 a large number of PE-to-PE deal (or secondary transactions) where one PE investor sells holdings to another.
Meanwhile, on the brighter side, India remains to a be hot destination for funds. Apart from equity investments from FIIs, they have together pumped in a whopping Rs 65,309 crore in Indian equity market since the beginning of 2013, the country is also attracting large amount o foreign direct ivestments. Baring Private Equity, for example, has just announced that it will pick up a 14 per cent stake in Lafarge India, the Indian venture of Lafarge SA, the France-based cement manufacturer, by investing $260 million or Rs 1430 crore. This is the largest ever PE investment in India’s cement sector, whose fortune is closely linked to the economic prosperity of the country.
Surely, many believe that the Indian economy has bottomed out as the government expects a GDP growth rate between 5.5-6 per cent in the current financial year, up from 5% the previous year. Latest low inflation figures also has raised that the central bank will cut interest rates further, lowering the cost of fund for the industry. The Finance Minister P Chidambaram’s recent road shows in the US and in Canada to woo investors have also reassured them on India’s commitment to economic reform that began towards the end of last year. It is expected that the reform measures taken by the government will start showing positive results from the first half of 2013-14 and will pick up further momentum in the second half. Prediction of normal monsoon resulting in decent agricultural growth has also added to the optimism. This only shows that the ‘India story’ is still alive despite an unusually poor economic growth in 2012-13. The economy is also getting support from the drop in international prices of crude oil, gold and coal, the three together form a large part of India’s import basket.