Private equity will seek to exit four companies in 2011-12

Call it the five-year itch. When private equity investors take up shares in start-ups or provide growth capital for companies that need to scale up their businesses, they usually seek to take their profits after a maximum of five years. The fourth year is when they start looking out for exit options.

A case in point is the recent deal involving Blackstone, a large private equity fund, which sold its majority stake in business processes outsourcing (BPO) firm Intelenet to UK’s Serco Group in a $418-million (around Rs 1,900 crore) deal. The deal could set a benchmark and many others could follow the exit model in the IT services or BPO space.

Applying the logic of the five-year itch, Firstpost has identified four companies where private equity investors may be looking for an exit in the foreseeable future. These companies saw private equity investment being made five years back or more, and their investors could be seeking exit options.

[caption id=“attachment_21105” align=“alignleft” width=“380” caption=“Private equity investment made five years back or more could be seeking exit options. AFP”] [/caption]

These companies are Quattro BPO Solutions, Vijai Electricals, Moser Baer, and Himadri Chemicals. Their investors will be looking for deals over the next 12-18 months. Here’s what these companies are about.

Quatrro BPO Solutions: Founded by Raman Roy in 2005, this company obtained a first round of funding at inception by raising $100 million from Olympus Capital. The company raised another $13 million in 2010. It has over 3,000 employees and is based in Gurgaon, on the outskirts of Delhi. An investment banker at a foreign bank expects this company to look for a trade buyer rather than a stock listing.

Quatrro BPO Solutions reported revenue of Rs 213 crore for the nine months ended December 2010, according to a note by credit rating agency Care. The company reported a net loss of Rs 13.15 crore. The note, dated 10 May 2011, highlights the weak, but improving, financial profile and intense competition in the BPO sector as constraints while reaffirming the rating for bank facilities. The exact shareholding pattern of the company is not known but Olympus Capital is expected to own a substantial portion of the equity. Raman Roy had successfully exited Spectramind, the venture he set up, by selling it to Wipro in 2002.

Key factors that indicate the company could be in play:

* Private equity fund holding is over five-years-old now

* BPO companies are the flavour of Deal Street and the Intelenet transaction sets a benchmark

* Raman Roy, founder at Quatrro, has an exit track record

Vijai Electricals: Stock market rumours suggest that US giant General Electric was talking to Vijai Electricals, a privately-owned power equipment maker that makes transformers, for a deal. The company reported revenues of Rs 1,609 crore in the year ended March 2010, according to the latest available data. Private equity fund 3i invested $26 million in this company in 2006. An energy sector consultant said that if one assumes revenue growth of 15 percent and net profit margins of 10-11 percent, the company should have reported revenues of around Rs 1,800 crore in the year ended March 2011 and could grow to Rs 2,070 crore by March 2012. The net profit for that year would be Rs 207 crore. “A price-earnings multiple of 15 times (i.e. the market price is 15 times earnings per share) is the best case scenario, giving Vijai an enterprise value of Rs 3,000 crore,” the sector consultant said.

The consultant said that demand for power-related equipment is only going to rise going forward considering that 62 gigawatts (1,000 megawatts make on gigawatt) of power generation capacity is planned to be created by the Indian government.

Key factors:

* Rumours reported by the press about a possible trade sale to GE

* Private equity investment more than five years old.

* Transformer space is attractive, considering the power generation potential in India

Moser Baer: Warburg Pincus owns a 30 percent stake in the stock exchange-listed Moser Baer. Warburg has had partial exits from companies like WNS and Bharti Airtel in the past, but has held on to Moser Baser for nearly 11 years. The street has been expecting the owners, led by Deepak Puri, to manage Warburg’s exit for years. The company’s management has said in the past that any exit by Warburg is not a concern as Moser Baer has already witnessed a partial exit from Electra Partners, another private equity investor. Electra Partners continues to own just over 5 percent of the company.

[caption id=“attachment_20990” align=“alignleft” width=“380” caption=“The street has been expecting the owners, led by Deepak Puri, to manage Warburg’s exit from Moser Baer for years.Photo by Lindsey Bieda from flickr.”] [/caption]

However, the financial performance of the company is one reason for the delay, according to one analyst. Moser Baer reported a net loss of Rs 406 crore for the financial year ended March 2011 on revenues of Rs 1,873 crore. This is the highest net loss reported by the company in four consecutive years of losses. Credit rating agency Crisil downgraded the company’s debt in March 2011. “The downgrade reflects MBIL’s weaker-than-expected performance in its core business of optical storage media on account of pricing pressures and increasing input (primarily polycarbonate) costs,” the credit rating agency says in a note.

With large long-term debt repayment obligations of over Rs 300 crore in 2011-12, Crisil believes that Moser Baer will need to refinance, as cash accruals are unlikely to suffice, and its cash surpluses are gradually depleting.

Key factors:

* Private equity fund has stayed invested since 2000

* Company reported net losses for the fourth consecutive financial year

* High investment in photo-voltaic segment planned

Himadri Chemicals: Citi Ventures, a private equity arm of Citibank, invested in Himadri in 2006. Citi owns 12.29 percent in the company. Its current market value is close to Rs 1,500 crore. Bain Capital, which entered the company a little over two years ago, owns 26.75 percent of its equity. Himadri makes coal tar pitch, a chemical used to make graphite electrodes by the aluminium industry. The demand for this chemical has surged along with the demand for the metal.

According to one investment banker, the company is likely to witness only a secondary market sale by Citi Ventures as a buyout or sale of the company is not anticipated. This means Citi Ventures will exit by selling its stake in the stock market. Considering the high growth reported by the company over the past few financial years, the street expects buyers to absorb the company’s shares easily in the stock market.

Key factors:

* Private equity invested for five years

* Company on high growth path, hence demand for its shares will be good

* Bankers expect sale by Citi in the secondary market only

When they want to exit, private equity investors either find a trade buyer (a bigger company or another private equity fund) or go in for a public listing of shares. Jyothy Laboratories witnessed an initial public offering in 2007 when private equity investors offered their shares for sale to the public.

Paras Pharmaceuticals, a privately-owned drug company, was bought by consumer giant Reckitt Benckiser from private equity fund Actis last year.

A key driver for such deals is also lowered private equity exit expectations. This means, they are willing to negotiate a lower exit price than what they were asking for in the past. According to a report in The Economic Times, in 2009, investors, led by Trident Capital, were looking to exit former KPMG captive outsourcing unit, Outsource Partners International, at around $130 million. Last month, they sold out to EXL Services for $91 million.

The other factor driving drive deals is the presence of uninvested, or dry capital, that funds worldwide are sitting on. According to consulting firm Bain, the amount of ‘dry capital’ in the private equity space globally is a staggering $1 trillion ($1,000 billion, or Rs 45 lakh crore) and it is likely to find its way into emerging markets like India.