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February 24, 2005

Indian cos. opting for IPOs over Private Equity

Reuters has this interesting news item about how, thanks to booming stock markets, Indian companies are finding it easier - both from a valuation and control perspective - to go in for IPOs rather than seek private equity funding:
Company owners who might typically have struck a private equity deal to raise cash for expansion are instead considering floating shares on a stock market that has risen 30 percent over the past six months.

That is frustrating for private equity houses hoping to multiply record piles of cash by steering unlisted firms to prosperity. "It is tougher to close a deal now," said Darius Pandole, chief operating officer of IDFC Asset Management Co. Ltd...

...The IPO of Jet Airways (India) Ltd., which saw potential private equity suitors walk away due to differences over valuations, drew orders for 5.2 times the shares on offer at a price/earnings multiple of up to 21.5.

Robust economic growth tipped to reach 6.9 percent in the year to March and rising incomes among a 300 million-strong middle class are behind the surge in the stock market, which hit record highs last week.

Fund managers have poured more than $1.5 billion into Indian shares this year after ploughing in a record $8.47 billion in 2004. "Private equity investors would have to stretch to match the higher valuations being offered by the public markets today," said Ravi Sardana, vice-president of ICICI Securities Ltd. "Add to this the absence of any dilution of rights in the public issue route, which provides comfort to the family-run businesses," Sardana said.

With a growing pool of private equity money chasing fewer deals, investors risk overpaying. "We may see irrational competition which would result in deal prices being bid up to an unrealistic levels," IDFC's (Darius) Pandole said.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.