PE/VC-backed firms to offer exit options to promoter funds via IPOs, M&As

Many private equity and venture capital-backed companies are expected to tap into the capital market this year, even as mergers and acquisitions (M&As) have emerged as another favourable exit route for the PEs and VCs in India, according to an ASSOCHAM-Deloitte study.

PE-backed companies are expected to tap into the capital markets in 2017, giving opportunities for the exit of private equity funds from the ventures they had funded earlier. Examples include a planned $600 million IPO by a non-renewable energy firm, which has been financed by a global private equity major.

There are many other large and mid-sized listings of PE-backed companies that are planned in 2017, said the ASSOCHAM-Deloitte joint paper.

The study also stated that the rising trend of M&As as a favourable exit option is likely to continue in the near future, and added that consolidation, restructuring, and asset sales are expected from Indian companies that are highly leveraged. “This is expected to influence the rise of M&A activity in India. Moreover, M&A activity in India is also expected to be fuelled by foreign players looking at a foothold in the Indian market and an increasing preference for inorganic entry. Private equity funds will closely eye this opportunity to use M&As to exit their investments.”

Historically, IPOs have not been amongst the most favoured exit routes for private equity funds in India. Compared to China, where historical and academic research has proven that IPOs are the more prevalent exit channel, M&As have been more dominant in India.

This is despite the fact that, traditionally, it has been easier for Indian companies to get listed than for companies in China (including Hong Kong). At present, there are about 1,800 companies listed on the Hong Kong Stock Exchange, and there are just over 1,000 listings on the Shanghai Stock Exchange, compared to over 4,000 active listed companies on the Bombay Stock Exchange in India.

The year 2016 marked a slowdown in private equity and venture capital investment activity in India, but trends towards the end of 2016 and early 2017 indicate a strong growth outlook.

“With the underlying India growth story intact, deal activity is expected to continue on an upward journey. Private equity and venture capital firms are also raising funds and gearing up to invest in India,” said ASSOCHAM Secretary General D.S. Rawat.

He further added that private equity exits, meanwhile, have witnessed a steady growth in value terms. With M&A activity reaching a five-year high of $61 billion in 2016, courtesy a bagful of multi-billion dollar deals, M&As have emerged as the most favourable route for PE exits.

Continued global interest in India, and consolidation and debt-reduction by Indian companies, is expected to offer M&A exit opportunities to PE/VC funds in the future, too. Equity capital markets, particularly IPO listings, have also seen robust activity, lending a bullish outlook to IPOs as an exit route for existing private equity investors.

Secondary sales and open market exits would also continue to be amongst the key exit routes for private equity and venture capital investors. If trends in the first three months of 2017 are any indication, open market exits will continue to account for a lion’s share of private equity exits.