A record Rs 85,000 crore of capital, invested for six years or longer, is waiting to exit. This is equal to 10 years' worth of exits.
The private equity space is entering a difficult phase - possibly the worst seen in years. Several thousand crores of invested capital is waiting to exit in an extremely tough market where returns on deals have plummeted four times,reports CNBC-TV18's Farah Bookwala. It's hard to envy a fund manager in this market. According to Avalon Consulting, the worst of times - termed as the ‘looming logjam phase’ - has only just begun for private equity players.
A record Rs 85,000 crore of capital, invested for six years or longer, is waiting to exit. This is equal to 10 years' worth of exits. But exits will be slow and investments will yield even lower returns, mainly through secondary sale or buybacks. Exits through IPOs - a staple during the 2004-2009 boom - will be few. Sectors such as IT/ITeS, energy, engineering goods and auto will be most impacted. Avnish Bajaj, MD, Matrix Partners says: “Very sobering statistics. Rs 85,000 crore worth of investment looking for an exit, this is USD 15 billion. Typically that USD 15 billion, given the stage at which they are, would be owning 10-15 percent of a company. If we want to generate a 3x on that, we would need USD 45 billion to come out. With that ownership, we have to create USD 400-500 billion of value for us to generate a 3x. That is just not going to happen.” But the question to be asked is how did these investments snowball into something so huge - a USD 15 billion cashtrap. PE firms openly admit, it wasn’t just the slowdown, but also bad investment decisions. Bajaj adds: “First of all, take the Rs 85,000 crore and say 70 percent was wrong. That's the starting point. I don’t think people have reconciled to that starting point and I think they are lying to investors. If they have lots of write downs/ mark downs, it’s because these were investments that should have not been made.” But what can fund managers do to redeem this situation? Experts say managers need to start visualising their exit before making an investment. Vishal Tulsyan, MD, Motilal Oswal PE says: “Within six months, start creating a sense in the mind of the entrepreneur that you need to exit within 3-5 years.” Manish Kejriwal, Managing Partner, Kedaara Capital says: “The way we structured Kedaara was to think about exit before we enter… We are either investing in significant majority control, above 50 percent, or in specific situations significant minority stake, but nothing below 15-20 percent.” Experts add that exercising financial discipline when valuing companies is crucial to a successful exit.
The private equity space is entering a difficult phase - possibly the worst seen in years. Several thousand crores of invested capital is waiting to exit in an extremely tough market where returns on deals have plummeted four times,reports CNBC-TV18's Farah Bookwala. It's hard to envy a fund manager in this market. According to Avalon Consulting, the worst of times - termed as the ‘looming logjam phase’ - has only just begun for private equity players.
A record Rs 85,000 crore of capital, invested for six years or longer, is waiting to exit. This is equal to 10 years' worth of exits. But exits will be slow and investments will yield even lower returns, mainly through secondary sale or buybacks. Exits through IPOs - a staple during the 2004-2009 boom - will be few. Sectors such as IT/ITeS, energy, engineering goods and auto will be most impacted. Avnish Bajaj, MD, Matrix Partners says: “Very sobering statistics. Rs 85,000 crore worth of investment looking for an exit, this is USD 15 billion. Typically that USD 15 billion, given the stage at which they are, would be owning 10-15 percent of a company. If we want to generate a 3x on that, we would need USD 45 billion to come out. With that ownership, we have to create USD 400-500 billion of value for us to generate a 3x. That is just not going to happen.” But the question to be asked is how did these investments snowball into something so huge - a USD 15 billion cashtrap. PE firms openly admit, it wasn’t just the slowdown, but also bad investment decisions. Bajaj adds: “First of all, take the Rs 85,000 crore and say 70 percent was wrong. That's the starting point. I don’t think people have reconciled to that starting point and I think they are lying to investors. If they have lots of write downs/ mark downs, it’s because these were investments that should have not been made.” But what can fund managers do to redeem this situation? Experts say managers need to start visualising their exit before making an investment. Vishal Tulsyan, MD, Motilal Oswal PE says: “Within six months, start creating a sense in the mind of the entrepreneur that you need to exit within 3-5 years.” Manish Kejriwal, Managing Partner, Kedaara Capital says: “The way we structured Kedaara was to think about exit before we enter… We are either investing in significant majority control, above 50 percent, or in specific situations significant minority stake, but nothing below 15-20 percent.” Experts add that exercising financial discipline when valuing companies is crucial to a successful exit.