Private Equity firms not losing hope
20 Apr 2009
Private equity investors, it is believed, have the expertise to understand the complex ways in which businesses operate. Retail investors have so
much faith in PE firms' domain knowledge that they favour companies that have high institutional holding.
However, nearly 50% mark-tomarket (MTM) losses on their India portfolio has shaken the market's faith in PE firms. In dollar terms, the losses amount to around $2.3 billion on total investments of $6.3 billion in India(for deals struck in the year 2007 and 2008).
The losers include the very best of PE fraternity, with names like Citigroup, Temasek, 3i, UTI Venture Funds, CLSA, Warburg Pincus and JP Morgan figuring in the list. Losses suffered by retail investors, who invested in companies with high institutional holdings, could be many times the losses posted by PE firms. Despite the fall in value of their investment, retail investors are still holding on their investments. Bogged by the ups and downs of the market, they are left wondering as to what should be their next step.
The extent of losses is huge. Less than 10% of the 93 private investments in public equity (PIPE) deals struck in 2007 and 2008 are in the black, because of high entry points. The two worst deals, in terms of notional erosion of value, are the investment by New Vernon in Prime Securities and Kotak's investment in Heritage Foods.
At the current stock price of the two companies, the MTM losses work out to be 93% and 91%, respectively. It is not only the loss suffered but an exit horizon is also not visible. Nalanda Capital's investment in Vaibhav Gems in the year 2007 has eroded its networth by 90% over a span of two years. A number of PE firms have invested heavily in unlisted companies. The losses could be huge, given the high valuations that many of such companies got then.
The average loss on investment for all private equity deals done in 2008 stands at 39%. The results of 2007 are not better either. Private equity investments struck in 2007 stand to lose $1.73 of their value at 35%.
The losses suffered by PE investors show the frailty of the India story, as no sector escaped value erosions. The worst affected sectors are real estate, information technology, banking and financial services, and healthcare. Clearly the perception that PE money is smart money remained just, a perception.
All hope is not lost yet. These investment honchos have managed to strike some good deals as well. A consortium of PE players like Saffron, Trinity, Barclays, T Rowe Price have made close to 50% profit on their investment in Phoenix Mills, a commercial and retail real estate developer. Nalanda Capital's stake in regional entertainment and news channel, Sun TV network has also grown by a credible 40% over its investment last year.
Nonetheless, there are some other positives also. Unlike portfolio investment, PE money could stay in India for another two-three years . Retail investors could, thus, avoid liquidating their portfolio. Recovery in equity market is not expectetd any time soon, patience would still prove to be a virtue.
The losses suffered by PE firms prove that the market spares none, not even the brightest of brains in the street. All valuation tools have been savaged at the altar of market volatility. Even the smartest guy in the street has been beaten down.
Though it is too early to comment on the investment rationale and valuations at which these deals were struck, the fact remains that PE firms are in no urgency to exit. This leaves a clue or two for the retail investor.
Note: It is assumed that the investments made during 2007 are still being held by the PE investors to arrive at current MTM value, for want of data.