PE firms exit $18 bn in two years MODE OF EXITS

Lack of exits and poor returns have been the biggest bane of private equity (PE) firms in India. While returns remain an issue, PE funds in India have returned around $18 billion to investors in the past two years — $8.12 billion in 2015 and $9.77 billion in 2016, according to research firm Venture Intelligence.

A PE firm estimate exits of $10.9 billion in 2015 and $9.8 billion in 2016. Exits as a percentage of investments increased from 43 per cent between 2006 and 2010 to 53 per cent between 2011 and 2016, despite a spurt in investments in the past two years due to ecommerce.

Renuka Ramnath, founder and managing partner, Multiples Private Equity, feels that exits will boost the confidence of international investors. ‘‘Many large institutional investors are strictly driven by proven performance, and they need evidence of data to allocate money,” she said.

This should encourage more institutional investors to % of Total Public market sales Strategic sale Secondary sale Buyback invest in India. Around a dozen pension funds like CPPIB, CDPQ, Ontario Teachers Fund (OTP), ECS of Mayasia, pension funds from Japan are active in India. Exits could raise the tally to 50 in three years, says Ramnath.

A revival in capital market, good momentum of PE-to-PE deals (secondary deals) and M&As have helped PE firms get exits. “While the capital market has been good, other exit routes have not slowed. Less than 40 per cent of our exits relied on capital market,” said an official at ICICI Venture, which has seen 45 exits worth $1.5 billion since 2010.

An analysis of mode of exits reveals that the share of IPOs shrunk to 35 per cent in 2016 from 76 per cent in 2012, while the share of strategic sales went up to 40 per cent in 2016, from nine per cent in 2012 and secondary sales increased to 21 per cent in 2016 from eight per cent in 2012. ‘‘There’s a stock of assets and wide range of players today from early stage, to mid-stage players like Multiples to multi-billion dollar PE firms, which is helping PE-to-PE secondary deals,” says Ramnath.

“Exits are an unnecessarily over-stated problem. The only difficulty in exits has been assets largely in the infrastructure space which were contracted during the 2006-08. Barring that particular vintage and category of assets, exits have never been a problem,” says Ramnath.

But numbers point otherwise. Between 2000 and 2013, of the $94 billion invested, $24 billion (on a cost-basis) exited at a value of $43.5 billion, or a 1.8 return multiple, wrote Vivek Pandit, senior partner, Mckinsey & Co, in a blog in 2016. Of the $70 billion that stays invested, $33 billion was invested between 2000 and 2008, he wrote.

PEs invested at high valuations during 2006-08 and would have struggled to return $10-15 billion that came during this period, estimate experts.

Private equity, typically, is a high-risk high-returns asset class, but many PE investors say it has become a low-returns game in India, with most of them generating low, singledigit returns from their portfolio.

CDC Group, the investment arm of the UK government, had earned zero returns from India between 2004 and 2009 versus 20 per cent-plus net returns from China and in mid-teens from the Southeast Asia.