PE firms like Warburg Pincus, Blackstone & others rack up big losses on Dalal Street

MUMBAI: The common man on Dalal Street who has stayed invested in Punj Lloyd for nearly five years, ignoring several exit options along the way, may be embarrassed by his foolishness and huge losses.

After all, the stock, which went as high as Rs 578 in January 2008, has now tumbled to less than a tenth of that value. Retail investors who bought into Punj Lloyd, however, can take solace in knowing that they weren’t the only ones who lost their shirts.

Keeping them company are research-driven private equity (PE) investors. For instance, in 2007, Warburg Pincus had bought into stock of Punj Lloyd at Rs 275 a share when it was raising Rs 814 crore through a share sale to qualified institutional investors.
Like many retail investors, Warburg chose not to cash in when the stock peaked a year later in the belief that it would create more value. Today Warburg is sitting on a notional loss of 80% on its investment.

Warburg is just one among a clutch of global PEs with investments in listed companies that are under water. Blackstone, Goldman Sachs, Apollo Management and Actis are the others.

Over a five-year period, six of nine such deals — called PIPE or private investment in public equity — worth at least $100 million in which PEs continue to hold shares, are languishing below acquisition costs.

The performance of all nine investments is nothing to crow about, either—it’s worse than the performance of the benchmark Sensex and has knocked off 35% of the combined investment of Rs 5,560 crore. The Sensex has risen by 18% since August 2007, the month in which the first deal was struck (see table).

The failure of big PIPE deals may pose a systemic risk to the PE industry, says Rahul Bhasin, managing partner, Baring Private Equity. “It raises questions on corporate governance and transparency: does a seller share all information with the buyer before a deal,” he asks.

However, in at least four transactions, the blame may not lie entirely with PE investors as the deals were sealed before the onset of the 2008 global financial crisis. “At that time, valuations were high and the PE funds would not have been in a position to anticipate the deterioration in overall economic conditions that followed the crisis,” says Vikram Uttamsingh, executive director and PE head at KPMG in India.

Blackstone and Actis are hopeful of generating good returns when they exit these stocks, although they are in no hurry to do so.

They say they are long-term investors and therefore committed to these investments.

The deals are based on sound investment rationales but the macro-economic environment went wrong, resulting in fall in the stock prices, they add. Goldman Sachs, Warburg Pincus and Apollo Management did not wish to participate in this feature.

Officials at Blackstone, which has invested in construction company Nagarjuna Construction Co (NCC), say the slowdown in the sector has resulted in destruction of shareholder value.

“The poor price performance of all construction companies is the result of the sorry state of our infrastructure sector due to the difficult macroeconomic environment and deteriorating governance in India,” says Akhil Gupta, chairman, Blackstone India Advisors.

“The bearishness of the IDFC stock (in which Actis is an investor) is essentially on account of challenges surrounding the infrastructure sector and asset quality issues in that space,” adds J M Trivedi, head of south Asia at Actis.

Whatever the reason, the nonperformance of PIPE deals will hurt the overall performance of PE funds, says head of a global PE fund.

The executive, not wanting to be named, quoted a KMPG report that said PE funds are unlikely to generate a 25% annual internal rate of return, a minimum threshold required to reward investors after meeting the cost of running funds.

For Actis, IDFC is the only PIPE deal in its kitty. “IDFC is well capitalised and has enormous scope to leverage and grow its loan book. Our normal holding period is 3-5 years and we are confident that we will create value during this period,” says Trivedi. Actis bought into IDFC in July 2010.

The pressure is more on Blackstone as it has deployed 40% of its resources in two underperforming investments, NCC and Gokaldas Exports. Blackstone, however, is hopeful.

It says NCC is well positioned to benefit from atrillion dollar investment in India’s infrastructure in the next seven years; and Gokaldas will gain from a shift in production of garments away from China, which is becoming uncompetitive.

Both companies have weathered the storm well, performed better than most of their peers and are well positioned for the future, says Gupta. “We are not affected by a notional drop in stock prices as we don’t need to exit or raise capital.

We actually take advantage of drop in price to increase our ownership,” adds the Blackstone India head. The scenario on the ground may be less rosy. The head of a PE fund run by an Indian conglomerate says that if a transaction fails to generate value in five years, the task gets even more difficult after that period.