EMERGING MARKETS: A surfeit of secondaries

Over the past two years, exit conditions in India have tightened. 152 exits were completed in 2010, but there were only 84 last year and 78 in the first 10 months of 2012, according to Venture Intelligence, an Indian private equity research service.

Shujaat Khan, managing director at Blue River Capital, says exits were “very difficult” for a period of about 12 to 18 months until September 2012, primarily because of “a significant focus on the macro policy environment in India … Everything went into limbo due to uncertainty and, more specifically for private equity firms, because of the retrospective tax.”

That’s impacted IPOs. In 2010, there were 24 IPO exits that yielded $2.2 billion; in 2011 and 2012 combined, there have been just eight, with a total value of $449 million.

Meanwhile, exits to other private equity firms have risen the percentage of secondary sales has increased consistently over the last four years from 12.5 percent in 2009 to 26.9 percent in 2012.

According to Vishakha Mulye, managing director and CEO of ICICI Venture, many private equity-backed companies still offer a clear upside – but are not large enough to list on the public markets. “There is a lot of growth left in them in the private market … this underlying growth is very attractive to private equity investors,” she says.

Equally, many of these companies are looking for a fresh capital injection that they haven’t been able to get from the banks or the public markets, she suggests. And it’s easy to see the attraction for a buyer, who can expect better standards of governance.

As such, secondaries are a good way for firms to exit companies in the SME segment, she argues. “It is a natural ecosystem development, which is allowing companies to scale up and giving exits to smaller private equity funds.”
According to one industry source, Blue River – which has generated a 3x return via the gradual sale of its stake in City Union Bank over the last year – is in advanced negotiations for another exit to a private equity fund. It has also just begun the sale process for a third asset, which is expected to sell for north of $250 million to $300 million; in this case, the firm is targeting pension funds, sovereign wealth funds and the larger buyout funds.

ICICI Venture has realised $700 million from 30 exits in the last three years – five were secondary sales and one was to a strategic. Mulye says secondary deals are mainly happening in sectors that investors believe have attractive growth prospects, like healthcare; for instance, earlier this year it sold its stake in Sahyadri Hospitals to IDFC Project Equity.

That said, a secondary sale will not always be possible. According to Nick Bloy, managing partner at Navis Capital Partners (whose four recent exits in India have all been to trade buyers), many private equity firms still “seem somewhat inhibited, perhaps by problems in their existing portfolio companies or in their ability to exit those companies”.

In other words, the tightening of exit conditions in other areas may be both promoting and constraining this particular exit route.