A tight IPO market in India is pressuring some fund managers into secondary sale exits, according to local sources.
“Secondaries between private equity [firms] have pretty much become a norm in terms of Indian exits,” said Siddharth Shah, partner at Khaitan & Co in Mumbai, adding that the exit situation is likely resulting in some discounts on secondary deals.
If you look at the valuation on an exit to a strategic buyer compared to that of a private equity investor, there is clearly a haircut or discount attached [to the latter]
Siddharth Shah, partner, Khaitan & Co
“From a private equity perspective, if you look at the valuation on an exit to a strategic buyer compared to that of a private equity investor, there is clearly a haircut or a discount attached to [the latter]. But obviously you negotiate that down and [you exchange] time for money, which justifies that discount.”
However, not all firms are willing to forego returns for time.
Sanjeev Krishan, executive director at PricewaterhouseCoopers in India, said, “What we have observed is if you believe in an asset a lot and it needs a little bit more time to achieve its value, there has been a possibility of rolling over investments into new funds or in some cases to work with LPs to say can we stretch the fund a little bit.”
However, waiting for the right price when exiting your business could be detrimental to its ultimate valuation.
“I know of at least three or four funds that have been specifically mandated to not do anything else but look at exits over the next two years,” an industry source told PEI.
UK-listed 3i, as part of a global restructuring, last year cut staff in Mumbai and said it would not invest in India in the foreseeable future, PEI reported earlier. PEI's source said that 3i is reluctant to consider secondary sales to divest some of its India assets.
“There are people who would be happy to look at those assets,” he said, but added that coming to an agreement on valuation in any secondary sale is often the hard part.
“It is a battle of attrition really as to who is going to [give in] first. If, [for example], I have a two-year time period [to sell] and the other guy knows it, unless something changes drastically in the economy, it is a matter of attrition.”
A source close to the firm said 3i's current focus is to intensively manage its portfolio to maximise returns for its shareholders and LPs and it is able to make further investments into existing portfolio companies. However, the firm is not considering secondary sales at this time.
Secondary sales have been slow to pick up because the Indian private equity market is not mature enough. India had 24 secondary deals in 2012, according to data from Ernst & Young and PricewaterhouseCoopers.
Secondary sales in India in 2013 between foreign GPs include emerging markets firm Actis selling its minority stake in auto components maker Avtec to Warburg Pincus this month, according to media reports. Also in April, Kohlberg Kravis Roberts bought Warburg’s controlling stake in tire maker Alliance Tire Group, PEI reported earlier.