One Speciality restaurant IPO is not enough to feed PEs

In a year where 17 initial public offerings (IPO) have been called off, Anjan Chatterjee’s company Speciality Restaurants, that owns the fine dining brand Mainland China, has done well for itself.

The year 2012 has already seen companies like Micromax, Embassy Property, Joyalukkas, Lokmat Media, VRL Logistics, Aravali Infrapower and Semantic Space Technologies as not ready to tread the path of IPOs despite the clearance from Sebi.

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But Speciality managed a neat subscription of 2.5 times the offer.The negative: the retail investors’ portion in the offer was undersubscribed mainly due to the the steep pricing and poor market sentiment. When Speciality had launched the IPO, the Sensex was above 17,000. By the third day of the issue, the benchmark index had fallen below 16,000. But the qualified institutional buyer (QIB) portion was subscribed 4.68 times.

As a Mint report pointed out on Tuesday, the IPO has come as a glimmer of hope for private equity firms which are stuck with investments and looking for exits. The two major PE investors, AIF Partners and Glix Securities Pvt Ltd, are not cashing out now. The cost per share, according to Mint, comes to Rs 71 and Rs 81, respectively and have earned an internal rate of return of 18.16 percent, on the lines of what PE firms would expect.

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But not everyone is as lucky. PE firms investing in India have grown from a handful to around 500 since 2005, according to Indian Private Equity and Venture Capital Association. About $50 billion has been invested to date since 2004.

But as a Business Standard report shows, “The 2004, 2005 and 2006 vintages that should have delivered outstanding returns have, in fact, had patchy returns at best. While funds have gone on to raise their second and even third funds, investors and returns are languishing.”

And there is an increasing fear that private equity in India has lost its sheen.

Niten Malhan, managing director, Warburg Pincus, said at the Indian Private Equity and Venture Capital Association (IVCA) conclave, “We are long-term investors and, therefore, we tend to look through the euphoria and…through these periods when people will think everything is wrong. By definition that is how we look at investments.” He admitted India was facing macroeconomic issues which are cyclical and issues around governance in terms of policymaking, regulations and taxation, but hopes all those will get sorted out.

Even Haresh Chawla, former CEO of the Network 18 group, had told Firstpost, while India’s private equity space is extremely competitive and valuations had gone off track over the past few years, there is tremendous opportunity to explore the PE space. There is more money, he says, rather than businesses which would naturally mean heavy valuations, no proper evaluation of exit options and lowered rates of return.

This year private equity growth in India is also expected to slow down. According to Bain & Company’s India Private Equity Report, in 2011, the total deal value surged about 55 percent to $14.8 billion over the previous year, whereas this year over 65 percent of investors surveyed expect moderate growth of 10-25 per cent this year.

But Mahendra Swarup, president, IVCA, feels large deals will continue to happen because there is an opportunity for large deals. But there will be more money flowing into small deals as well which was not happening.

The lesson perhaps lies in the fact that PE is not a bank loan, not just a source of funds. PE partners need to be in tandem with the management to make the company grow in the way they want to see it grow. Specialist PE funds, which invest in say a specific sectors with specialised knowledge, could also help to put life into the Indian PE scene.