Most PE investment in BFSI space to exit soon

Investors expecting to milk up to 17% returns

The bulk of the private equity (PE) investments made in the banking financial and insurance (BFSI) space during 2005-2007 are likely to exit as the first major investment cycle comes to end. Industry analysts claim that only the BFSI will see ease of exit and high returns in the current environment.

“Ease of exit with high returns is likely to be best in BFSI sector, and worst in real estate this year,” said Amit Chandran, partner at Barings PE. “However, the pressure to exit the real estate and infrastructure sectors would also be high as PEs would like to exercise the exit option, even if they manage to save their total capital employed,” Chandran added.

Almost $30 billion worth of private equity capital was invested in India between 2005 and 2007, especially in sectors such as telecom, real estate, infrastructure, BFSI, IT and ITeS. Telecom took in around 22 per cent of the investment, with real estate and banking financial and insurance segment around 18 per cent each, IT and ITeS around 9 per cent and infrastructure around 10 per cent, according to data available with Barings Private Equity.

Avinash Gupta, director, financial advisory and PE at Deloitte India said, the maximum return that investors in banking financial and insurance sector can look at is around 15 to 17 per cent, while in certain sectors such as infrastructure and real estate, the exits are very challenging, with investors happy to recover their capital if not lose money. Besides, PEs are unable to find exit routes as IPOs are not happening in the sector.

“A majority of the deals in ports, roads and infrastructure space were bid at very high rates. These projects have not progressed at all due to policy indecisions and lack of approvals. Returns on these projects have not been there, while interest costs on the money raised have added to the burden of private equity players,” Gupta said.

The latest findings of Bain & Company’s India private equity report states that calendar 2012 would build upon the strengths shown by the PE sector in 2011, though growth would be somewhat constrained by challenges in exiting current investments and uncertainties around regulations.

Arpan Sheth, who leads the PE practice for Bain & Co in India said, “Consumer products, healthcare, banking and financial services are some of the most attractive sectors for future PE investments. Also, interest in e-commerce, for which deals in 2011 nearly tripled compared to 2010, is set to continue.”

The Bain report said 2011 saw a sharp 30 per cent drop in the number of exits over 2010. However, after a bleak 2011, about 60 per cent of the survey respondents believe exits will rise moderately in 2012 because of the growing pressure from pre-2007 deals.

Chandran of Baring PE says that such investment cycles don’t happen in bigger markets like the US and Europe, since large investments and exits happen every year. However, in the case of India, the first major PE investment cycle has come to an end and it will smoothen here over the next few years as well. It is not that exit routes are altogether unavailable. While there would always be exits at a given price, it may not be possible to locate a buyer at very high valuations, Gupta said.
vikassrivastav@mydigitalfc.com

Source:www.mydigitalfc.com