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Private equity exits in recent times

The boom phase of the economy in 2006 – 2007 led to a rush of private equity investments into Indian companies. Private equity investors were literally competing for deals in that market, and Indian companies would receive multiple term sheets (see news report here).
Note that private equity investment is typically the last stage before an IPO. Hence, a bad capital markets environment affects private equity investors first. The post-financial crisis slowdown and a bad IPO market directly affected private equity investors, who were looking at an IPO around 2011 – 2013. This was coupled with a depreciation of almost fifty percent in the rupee – this implied that the gains in rupee terms would have to be doubled to ensure a corresponding gain in foreign currency terms to investors, which was extremely difficult.
These factors have led to private equity investors looking at alternate exit strategies – typically, it could involve:
  1. Sale to other private equity investors – For example, KKR (a PE firm) acquiring a stake in Alliance Tire from a Warburg Pincus affiliate (another PE firm) (see here), or or  acquisition of Hexaware (an IT company) by Baring Private Equity Asia (a PE firm) from General Atlantic (another PE fund) and the promoters of Hexaware (see here).
  1. Sale to a strategic investor, which is more eagerly preferred by private equity investors. 
  1. Promoter /  investee company driven exit – if neither of the above two modes of exit are possible, promoter-driven exits are resorted to, which involve a buy-back of the investor’s shares or purchase of the shares by the promoters. Examples of these are exits in the real estate sector – such as exit by Deutsche Bank from a Lodha group company (see here) and by Farallon Capital (see here) from eight companies under the Indiabulls group (see here). 
PE investors have been happy so long as they have obtained costs and a relatively small rate of return, even though it is much less than the promised internal rate of return in the SHA. These exits are largely resorted to through negotiation and co-operation of the promoters - the alternative to that for a financial investor is protracted litigation which may not be fruitful for two reasons. The legal validity of some of their exit rights is not tested and certain and promoters may not have the requisite financial resources to finance the exit at the contractually agreed value. Therefore, private equity investors prefer to avoid litigation if they can recover costs (and a small return), and are not necessarily persistent on extracting the agreed IRR in real-life situations. 

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