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'Vintage' PE funds come up trumps in slowdown

The Economic Times:  May 04, 2009

Mumbai: Private equity (PE) investments — like wine — improve with age. The older it gets, the better it tastes. Investors who invested in the pioneering PE ventures of 2003 and 2004 stand to make good money as most funds have recorded annual profits exceeding 25-30% — on a compounded basis —over the past seven years. Most Funds that raised money in early 2000 are nearing investment life term and awaiting disbursal of profits to investors.

While the seasoned fund managers of ‘vintage PE funds’ are basking in the glory of initial investments, many feel they will not be able to replicate this performance in funds raised and invested during 2006-07.

“The fund that was raised and invested in 2003-04 has done much better. Funds that followed are doing well, but not as good as the first (2003-04) fund. Early-2000 was a good time to invest as valuations were lower, there were good investment opportunities and open-minded promoters and less competition,” said IDFC Private Equity CEO Luiz Miranda.

According to PE research firm Venture Intelligence, ICICI Ventures, IL&FS Investment Managers, UTI Ventures, IDFC PE, Chrys Capital, New Vernon Capital, Jacob Ballas Capital, Sequoia Capital (through Westbridge Capital), India Value Fund and Barings India were among the top PE dealmakers.

“Almost all funds raised in vintage-2000 would have made money for the investors. PE investors could make decent exits by way of IPOs, strategic stake sale and in some exceptional cases, even facilitated structural exit by the promoters,” said ace private equity fund manager Renuka Ramnath.

According to Ms Ramnath, the current phase will be challenging for funds that raised money and cut deals at the height of the bull run. “Investments made in companies with sound business models and steady cash flows will still make money. The struggle will be investments in ‘hyped companies or sectors’. Market cycles are inevitable; seldom the same sectors benefit from them,” she added.

According to experts, the key to investments at higher market levels and stretched valuations will be the exit points. Most PE managers feel that it will be some time before public issues or strategic buy-outs (especially the leveraged ones) gather steam. The other pointed question in the minds of PE funds is the time involved in earning decent returns for the investors.

“You’d make money if you had invested with discipline at the height of the bull-run. It all boils down to the type of deals and the company one has partnered with,” said Sunil Chawla, partner, Jacob Ballas Capital.

Taking into account the current times, PE funds are now extending the fund tenure (investment life) from the normal seven years to nine or ten years.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.