PIPEs up in the smoke?

The recent economic slowdown has taken toll on everything – pink slips are flying around, salaries have been slashed, people who have invested in stock markets have witnessed how their investment value evaporated with in a few months. Clearly, M&A and fund raising activities have slowed down and everyone feels that the present scenario might continue for a while though the recovery in India could be much quicker than that in the US.

I was wondering whether this is a good time for private equity players to pick up stakes in listed companies via private investment in public equity (PIPE) route. My thought was stimulated by a few reasons. BSE benchmark stock index has tumbled from almost 21,000 levels to 9,000 currently. Valuations across the board have become cheaper. Not just that, there are a handful of companies who had raised money through FCCBs few years ago and they have to repay some of them as maturity is approaching (conversion in many cases looks impossible unless the conversion prices are renegotiated). These companies need money. Above all, in August this year, SEBI amended guidelines for qualified institutional placement (QIP). The earlier pricing formula required investors to take an average price of six months or 15 days, whichever is higher. This was considered as a bottleneck for investments as the investors felt that this did not reflect the recent market conditions. The amended guidelines say that QIPs should be based on the average price of the shares two weeks prior to the issue. This was expected to boost PIPE deals in India. But I was surprised when I read an article on VCCircle, which stated that just one QIP has happened since April 2008.

Therefore, I went ahead to dig a bit further into PIPE deals. During 2007 when the markets were surging, the number of PIPE deals also surged unabated. A whopping $5.29 billion was invested through 63 deals in 2007. I think the institutional investors who are considered to be the most prudent, never saw a downturn in the market in the near future. But due to whatever reasons, the stock markets have collapsed by over 55% now. So, what is happening to those investments? According to an article in Financial Express, the current mark-to-market value of those investments is down 50.65% at $2.55 billion! As of the date of the article (November 17, 2008), only three deals (out of 63) were yielding positive returns. Manufacturing, IT&ITES and Real Estate have been the worst hit with over 70% erosion in value. However, Telecom and BFSI have somewhat withered the storm with less erosion in value of investments. Some investments like the one in GMR Infrastructure by a group of PE firms seem to have really gone bad. In December 2007, 10 PE firms including Eton Fund LP, T Rowe Price, Deutsche Asset Management and Citigroup had together invested Rs. 3,965 crore in GMR Infra at Rs. 240 per share. GMR Infrastructure stock was trading at Rs. 53.25 on November 28th on BSE.

So, what is the future course for PIPE deals in India? PE firms seem to be treading cautiously even though it looks like a good time for PIPE deals. In addition, even the companies may not be interested to dilute huge stake at cheap valuations at this stage unless they need money for simple survival. Hence, it’s unlikely that we would see the kind of activities witnessed in 2007 in PIPEs in spite of many positive market drivers. I always wondered why do I enter the stock market at the peak (typical retail investors’ characteristic) and lose the money immediately after that? Now, I am not the only one, I have the savviest investors with me!

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About Deepak
Venture Capital and M&A advisor, Entrepreneur, Startup enthusiast..

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