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Friday, June 13, 2008

Volatile capital markets coupled with high valuations have resulted in almost 67% of the private
investments in public enterprises (PIPE) deals in 2007 ending in the red. PIPE deals are
investments made by private equity funds in publicly-listed companies, usually through
preferential allotments.

Industry experts maintain that sustained downtrend and uncertain market conditions of 2008 have
pushed the overall till-date (as on June 10) return on PIPE deals of 2007 (on volume basis) to -
5.81%.

“This can largely be attributed to two things,” said Jagannadham Thunuguntla, equity head of
NEXGEN Capitals. “One, entry valuations were on the higher side and two, under-performance of
capital markets on the backdrop of fast changing global/Indian macro factors. Also let us keep in
mind the fact that the investments happened at the fag end of a bull market and we are looking at
valuations at what seems to be the beginning of the bear market,” he added.

In contrast, a quick review suggests that IPOs/pre-IPOs of 2007 yielded positive returns as of
June 10, on volume basis. It were pre-IPO investments that showed the best returns as
compared to IPO and PIPEs.

Though on volume basis, the return till-date is in positive territory of +3.73%, more than 50% of
the number of IPOs of 2007 are still below their issue price.

Many high-profile IPOs which attracted heavy over-subscription such as DLF, Puravankara, IVR
Prime, Edelweiss, Brigade, Omaxe, Fortis, FirstSource, BGR, House of Pearl Fashions and
Manaksia couldn’t sustain in the face bear onslaught. “In an economy which is looking at 8%-odd
inflation, a 3-4% return would mean that it not covering the actual growth rate but is reflecting
sub-inflation levels,” the NEXGEN equity head adds.

Pre-IPOs are far ahead in terms of till-date-return % in comparison to IPOs and PIPEs of 2007.
According to NEXGEN, in terms of till-date-volume-based-return, pre-IPO investments yielded an
impressive 76.21%.

Industry experts believe, among other reasons, one key reason for this could be significant pre-
IPO discounts offered in pre-IPO deals to the IPO price band. The pre-IPO investments into
Mundra Port, IRB Infrastructure, Koutons and Religare turned out to be multibaggers, while
Fortis, Shriram EPC and Mudra Lifestyle have disappointed.

N.Sukumar
Research Analyst