India exits: M&A trumps IPO

Travel website MakeMyTrip's $70 million IPO on NASDAQ in August 2010 was the first by an Indian company on a US exchange in four years. It was also phenomenally successful. The offering was priced at $14 per share, more than 5x projected revenues (the company had yet to turn a profit) and the stock soared 90% to $26.45 on its trading debut. This translated into considerable returns for MakeMyTrip's backers, including SAIF Partners, Tiger Global, Helion Venture Partners and Sierra Ventures.

The company was able to list in the US - and therefore target a more tech-savvy investor pool - because it is a Mauritius-incorporated entity, which meant the regulation requiring Indian companies to go public at home before venturing overseas didn't apply. The question now is will other Indian firms follow suit, opening up a lucrative IPO exit channel for private equity investors.

"You will see a lot more of these, a lot of GPs are sitting up and taking notice," Doug Coulter, head of private equity for Asia-Pacific at LGT Capital Partners, tells AVCJ. "If MakeMyTrip listed in India it would have been a very different story - there's no way it would have achieved the multiples it got in the US. It is potentially a game changer for India's private equity industry."

Public vs. private

According to new research published by LGT and INSEAD's global private equity initiative, private equity investments in China are twice as likely to result in an IPO exit as investments in India, where M&A remains the preferred route. The study, which relied heavily on data provided AVCJ research, found that in China 63% of private equity investments led to IPO exits compared to 33% in India. The breakdown was similar for venture capital, with 73% of China investors leaving via the public markets compared to 34% in India.

LGT and INSEAD looked at more than 1,200 private equity exits in China and India over the past 10 years - with China inevitably accounting for the bulk of activity. Exits were discounted where the entry transactions were real estate and infrastructure deals, cornerstone investments made shortly before IPOs, passive investments in large public companies and deals involving related parties. Findings were cross-referenced against views provided by a panel of LPs.

The study identified several reasons for the imbalance between IPO and M&A exits. First, China has been the world's largest IPO market for the last four years, with listings in Shanghai, Shenzhen and Hong Kong accounting for $129.8 billion of the $284.6 billion raised globally in 2010. India's bourses attracted $8.4 billion in IPOs over the same period. Second, the volume of companies seeking to list in China has turned the role of a pre-IPO investor into that of a financial investor who smoothes the path to the IPO. Having a reputable private equity firm on board often allows a company to jump the queue.

On the M&A front, China's commercial environment is not always conducive to trade sales, particularly where foreigners are involved. Buyouts are notoriously difficult, either because the owners - often state-owned - don't want to relinquish control or because the regulators don't approve a change in ownership.

"Political and regulatory hurdles for foreign strategic investors make a trade sale in many cases an uncertain prospect," the study said. "In contrast, the IPO channel provides a structured framework and access to more independent and efficient foreign business environments."

Out of 523 reported PE-backed IPO exits in China, only 217 were domestic listings. This compares to 90 out of 94 IPO exits in India (although the aforementioned Indian restrictions on listing location likely influenced this statistic).

A question of timing

The preference for IPOs in China naturally influences exit timing, with private equity investors seeking to get out during a bull market, while India's M&A-dominated market faces no such pressures. But in both cases, exits are happening increasingly quickly, with the average holding period for investments made between 2000 and 2005 falling from more than three years to around two years.

This underlines the opening up of public markets, increasing interest from multinationals and that the companies being targeted by private equity are growing rapidly - hardly surprising but, at the same time, not the whole story.

"With quite a lot of companies the GPs are just hanging on to the listed stock," Coulter says. "This means there are unrealized returns sitting in the portfolios of a lot of GPs and there is some market risk. But if companies are going public very early in their lifecycles many still have huge growth opportunities. In many cases, the attitude is ‘Let's get our costs back through the IPO and hold on to the rest.'"

The experiences of MakeMyTrip are, again, instructive. A secondary offering in May saw 5.24 million shares sold at $24 each, comfortably over the IPO price. Just over a quarter of the offering was made on behalf of the company with the remainder coming from existing shareholders. SAIF and Helion were among those taking the opportunity to part-exit their holdings, netting $62.8 million and $14.6 million, respectively.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• South Asia
• Greater China
• Exits
• LGT Capital Partners
• SAIF Partners
• Helion Ventures