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August 09, 2017

Private Equity “Re-Investments”: 2nd Time Lucky or Unlucky?

How have Private Equity funds fared when they revisit a company they have invested into in the past? An analysis by Venture Intelligence.

One of the best known quotes of legendary investor Warren Buffett is regarding his preferred holding period in outstanding businesses: Forever. Given the requirement of Private Equity (PE) funds to sell off their holdings in companies within 3-5 years (so as to distribute capital back to their investors), such funds are hard put to follow Buffett's maxim. Leading PE investors in India have however found creative ways to re-invest in companies they like and have profited from previously. While some fund managers have revisited companies that they had invested in at their previous firm, other managers have even bought out the holdings of their former employer. The results of revisiting “old flames” however has not been uniform.

The case of multiplex operator PVR  and two firms led by PE industry veteran, Renuka Ramnath is especially interesting. ICICI Venture (I-VEN), which Renuka Ramnath had led until April 2009, had originally invested about INR 48 crores in the company (in 2003 & 2005) - when it was still private. The company went IPO in late 2005 and I-VEN sold its stake in Jul-Sep 2007, raking in 4.3 times its invested capital. In 2008, I-VEN made a fresh investment of INR 31 crore in the now listed PVR. This investment however fetched less than 1.7 times by the time I-VEN completely sold its stake in April 2013.

In November 2012, Renuka Ramnath founded independent firm, Multiples PE, invested INR 153 crore in PVR through preferential allotment and, between April and September 2014, it made a part exit by selling shares worth about INR 152 crore (fetching a 2.37x return). In June 2015, Multiples PE invested INR 350 crore more via a new preferential allotment and through 2016, it invested an additional INR 122 crore in through open market purchases. In January 2017, Multiples sold INR 530 crore worth of its PVR holdings to fellow PE investor, Warburg Pincus, again fetching 2.37x return. Post the January part exit, Multiples held a 14% stake in PVR.

Nalanda Capital, a public markets focused firm launched in 2006 by former PE fund manager Pulak Prasad, has successfully revisited a few companies that his former employer - Warburg Pincus - had invested into including Havells India, DB Corp and Vaibhav Global. Interestingly, in the case of Vaibhav Global (earlier called Vaibhav Gems), Nalanda (which invested in October 2007) is sitting on gains even though Warburg Pincus (which had originally invested in 2005) lost a significant portion of its invested capital when it finally sold off its stake in 2015.

The WestBridge Capital team, which spun out of Sequoia Capital India in 2011 to focus primarily on listed companies, has also invested from their new firm into a clutch of companies that they had originally invested in while at Sequoia. However, their “re-investment” experience has not been as happy. Companies like Dr. Lal Pathlabs and eClerx, while profitable exits, fetched lower returns than that for Sequoia. Westbridge lost 50% of its invested capital in Manappuram Finance (whereas Sequoia had made over 7x), not to speak of its investment in the beleaguered Vasan Eye Care.

In April 2017, Mathew Cyriac, founder of newly launched PE firm Florintree and the former co-head of Blackstone’s private equity business in India, bought Blackstone’s 39.96% stake in listed textiles firm Gokaldas Exports for INR 58.61 crore. The deal saw Blackstone exiting with a 79% loss on the INR 676 crore investment it made a decade ago. While investing in companies where the first outing was profitable is one thing, this high conviction investment is one that even Mr. Buffett would want to make note of.

Leelavinothan Arumugam and Arun Natarajan are, respectively, Head-Research & Founder-CEO of financial analytics firm, Venture Intelligence.

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Venture Intelligence is India's longest serving provider of data and analysis on Private Company Financials, Transactions (private equity, venture capital and M&A) & their Valuations in India.