Celebrating 24thAnniversary BUSINESS 43

AFTERNOON DESPATCH & COURIER � Wednesday, March 25, 2009

BY MANIK K. MALAKAR

PIPEvaluations are con-tinuing to take a hit.After the euphoria of

the past several years, mar-kets seem to have comedown with a thud. PIPE is afinancial acronym thatstands for Private Invest-ment in Public Equity of theprocess of an investor’s or-ganization purchasing stockin a public company for thepurpose of raising capital.Private equity is usually

popular compared to tradi-tional forms of raising eq-uity such as IPOs because oftime and cost factors, andare in particular sought afterby small companies. How-ever this now seems to be athing of the past.Investments in listed

companies by Private EquityFunds in 2007 and 2008have lost 3.71 billion dollarscompared to the 6.96 billiondollars that they had put in.This represents a staggeringloss of 53.31 per cent. Thiswas the finding of Jagan-nadham Thunuguntla in areport on theMTM (Mark tomarket) valuations of PIPEinvestments of 2007 and2008. Thunuguntla is theequity head of SMC Capi-tals, one of India’s leading fi-nancial companies.In an indication that re-

flects currentmarket condi-tions, of the 93 PIPE

investments thatThunuguntla trackedin the period in ques-tion a mere five in-vestments havereturned positive val-uations on currentmarket conditions.‘This probably can beattributed to highentry valuations andtough capital marketconditions,’ saidThunuguntla.Till last year India’s

growth story wassomething that wasthe toast of the time.However, this veryphenomenon mayhave been one of thereason for the loss inPIPE valuations. “Itwas high entry valua-tions as also readingtoo much into the In-dian Growth Story byinvestors with hyper-aggressive assump-tions of growth,” saidThunuguntla about theother factors that con-tributed to the loss in PIPEvaluations.The herdmentality that is

the characteristic of the fi-nancial markets was an-other reasons for the PIPEloss of recent months.Thunuguntla informed thateach PE (private equity) in-vestor, without questioningany basis or logic involved,followed the other PE in-

vestor in the belief of ‘easymoney’ offered by bull mar-ket.“Further, most of the PE

funds had not-so-experienced fundmanagerswho didn’t have more thanfour to five years of experi-ence,” he said, “whichmeans they had never seen‘bear’ market in their life.”The cumulative sum of allthese facts was thet this re-sulted in ‘high entry valua-

tions’ at the time of invest-ment.“The market fall was just

waiting to happen,” contin-ued Thunuguntla. Hequoted Warren Buffet, andsaid that in financial mar-kets needles always keepwaiting for bubbles. That’swhat happened and this hasresulted in severe marketcorrection.Though it is gen-erally ‘high-entry valua-tions’ and ‘severe capital

market correction’ are pic-tured as culprits for suchunderperformance, it is in-fact underlying investors’mindset and their eligibilitythat need to be questionedafter such severe losses. Fur-ther also, it is high-time forLimited Partners (the in-vestors behind the PEfunds) to question the ra-tionality of investmentstrategies of General Part-ners and their prepared-ness.The decimation was

across all sectors. “The in-teresting part of this globalturmoil in comparison tonormal recessions is thatthe wide-spread, all-perva-sive industry-wide slow-down,” he said. SMCtracked various sectors in-cluding aviation, infrastruc-ture energy and retail fortheir survey.Curiously just five of the

93 deals that SMC hastracked have given positivereturns. There is no gener-ally perceivable for thesefive being the exception tothe rule and ending in greenterritory. “There is no spe-cific reason for those fivesuccessful deals except forbetter entry valuations,” hesaid.Out of the nine sectors

that SMC tracked in 2007the media sector with adownturn of 84 per cent was

themost hit. Of the 63 com-panies tracked in that yearonly four are in green terri-tory. In 2008 the retail sectorwas the most hit and of the30 companies just one is inpositive territory.As far as the future poten-

tial of this valuation goes in-dividual valuations aremore stock specific as op-posed to industry specific.For the individual investorhis or her risk appetite andother factors such as liquid-ity requirements. As far asthe PE investors howeverThunuguntla is morescathing, “they should gettheir theme of investingright, shouldn’t displaycrowd-mentality, should beready and thoroughwith re-lated research and shouldalways back reliable man-agements.” Additionallythey should focus on thelong term perspective andnot be swayed by quick re-turns which would includepre-IPO investments.The million dollar ques-

tion of coursewill have to bethe companies or sectorsthatw ill bounce back thefastest or first. “The compa-nies with sufficient cash bal-ances, lower leverage levels,with access to sufficientfunds, honest managementwill stand-out in this slow-down,” Thunuguntala in-forms. �

Jagannadham Thunuguntla – Equity Head SMC Capital

Tuition fees in form of heavylosses: PIPE valuations

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