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Mumbai: The global market meltdown in the wake of a credit crunch in the US and

its subsequent impact on Indian markets have crimped investments here by private
equity, or PE, firms in a preferred vehicle even as they have seen a reduction in the
total money flowing in from these firms.

Such investments, called private investment in public equity (or PIPE), refer to
money put by private equity firms into companies listed on the stock exchanges, and
they became popular with such firms in India in 2005, 2006 and 2007, when the
stock market soared.

The roiling in the markets seems to have changed that.

Up to the end of August, private equity firms had invested $8.2 billion through 280
deals, with 18% of this amount being accounted for by PIPE transactions, according
to Venture Intelligence, a research firm. In all of 2007, private equity firms struck
435 deals to invest $14.3 billion, with 30.7% of the amount being accounted for by
PIPE transactions.

The real numbers would have been higher last year, said an executive in a private
equity firm.

“This 30.7% may not capture all the deals done last year, especially those by hedge
funds that invested in the garb of private equity. On a most conservative basis,
PIPEs constituted 50% of all deals done in 2007, and this has slowed considerably in
2008,” said Nitin Deshmukh, head of Kotak Private Equity.

There’s a reason for private equity firms to be conservative with PIPE deals. Almost
three-fourths of such transactions they completed in 2007 have resulted in losses, at
least in mark-to-market terms (or in terms of the present value of their

According to NEXGEN Capitals Ltd, the investment banking arm of Delhi brokerage
SMC Global Securities Ltd, 46 of the 63 PIPE transactions or 73% of the total in
2007, are “in losses”. “Due to the continuous downfall and rough market conditions
of 2008, the overall till-date-return on PIPE investments of 2007 is –10.23%,
aggregating to a loss of $541.65 million on an absolute basis,” said Jagannadham
Thunuguntla, head of equity at NEXGEN, in a report titled Private Equity
Investments of 2007, Current Mark-to-Market Values: Up or Down, last updated on 5

“With most of the deals under water, it will be embarrassing for private equity
investors to explain themselves to limited partners,” said the head of a private equity
firm who did not wish to be named.

Limited partners are investors who put money into private equity funds, and to
whom the fund managers are answerable. “Under water” is a term that means an
original investment is now trading at a lower value.
Sensex, the benchmark index of the Bombay Stock Exchange, is down by at least
25% since the beginning of the year and several stocks are trading 30-40% below
their January 2008 highs.

The Blackstone Group, one of the largest global private equity investors with global
assets under management of $119.4 billion, has so far made six investments in
India, including three in listed firms. According to data provided by NEXGEN,
Blackstone’s investment in Hyderabad-based Nagarjuna Construction Co. Ltd is down
at least 40% in value. Its investment in Bangalore-based textile exports firm
Gokaldas Exports is down 39%. And its investment in Mumbai-based logistics firm
Allcargo Global Logistics is down 14.4%. Blackstone did not respond to an emailed

“Investors are on their gu-ard, and they are paying more attention to the mark-to-
market risks associated with putting money in listed companies,” said V. Jayasankar,
executive director and head of financial sponsors group at Kotak Investment

“A number of listed companies raise money because they get a certain valuation in a
bull run. In that sense, it is opportunistic. When they don’t get that valuation, they
may not want to raise that capital,” added P. Harshavardhan, partner and director at
The Boston Consulting Group.

And PE firms would themselves be more careful while picking targets, he added.