PE funds set to book losses in Gujarat Pipavav Port IPO

by www.indiape.com on Sat 21 Aug 2010 12:10 AM IST | Permanent Link | Cosmos

This is a story of one port, many funds and negative returns after a decade’s wait—a long-term
infrastructure story gone wrong.

A private equity (PE) fund managed by AMP Capital Investors of Australia is set to make a
substantial loss as it sells a part of its investment in Gujarat Pipavav Port Ltd in the latter’s initial
public offering (IPO).

It is not alone. There are quite a few other funds that are not happy with their investment in the
port operator.

In a rare loss-making exit through an IPO in the infrastructure sector, the 11-year-old India
Infrastructure Fund Llc will see a 27% erosion in the value of its investment if the issue, which
opens on Monday, gets priced at the upper end of the `42-48 price band.

At this price, India Infrastructure Fund’s loss will be `18.45-24.45 per share.

India Infrastructure Fund was launched in 1999 under a joint management agreement between
AMP Capital and the erstwhile Unit Trust of India, or UTI. In 2001, the fund bought 5.9 million
shares in Gujarat Pipavav Port for `47 crore at `80 apiece.

In 2007, AMP Capital became the sole manager of the fund with UTI’s exit. Subsequently, a
rights issue of 2.3 million shares in September 2007 at `50 apiece brought the average cost of
acquisition down to `66.45 per share.

A second fund—Infrastructure Fund of India Llc—will also offer its shares for sale in the issue.
This fund too is managed by AMP Capital.

The second fund had acquired 15.2 million shares at an average cost of `42.85. This fund too will
make a marginal loss if the issue gets priced at the lower end of the price band.

Together, these two funds will raise between `50 crore and `56 crore selling their shares, while
the company will raise `500 crore through a fresh equity issue.

Anoop Seth, managing director, AMP Capital Advisors India Pvt. Ltd, said the fund was exiting at
a loss. “The investments were made in 2001. However, since we have a strong belief in the
company’s future, we continue to hold 50% of our investment.”

A senior official from UTI Asset Management Co. Ltd said his firm was no longer involved in the
affairs of the two funds. UTI Asset Management was created in 2004 after UTI was restructured.

Tapasije Mishra, managing director, IDFC Capital Ltd, the book-running lead manager for the
IPO, said the fact that the issue was priced below what the PE investor had paid underlines the
attractiveness of the issue.

“Investors are getting it cheap. What is the problem?” he asked.

Another banker handling the deal said: “It was a closed-end fund and it’s being wound down. So,
they are booking a loss to meet the redemptions.” He did not want to be named.

A PE firm usually operates a portfolio for three to five years, and then exits for a high return. PE
firms prefer exiting portfolios through an IPO. Other exit routes include selling out to other
investors or a strategic sale.
With the stock market rising, a number of PE-backed firms have opted for IPOs. So far in 2010,
there have been 11 PE-backed IPOs, compared with two for the corresponding period in 2009
and eight in 2008.

In 2009, there were seven such exits and 10 in 2008, according to data by Venture Intelligence, a
research service focused on PE and mergers and acquisitions.

According to PE investors, fund exits at a loss for two reasons—first, when a fund’s life is coming
to an end; second, when it judges that the market will not support the price of the issue and it’s
better to exit.

“Usually PE firms look at a 20-25% IRR (internal rate of return) on their investments. However,
that doesn’t happen in each and every investment,” said Hetal Gandhi, managing direcor, Tano
India Advisors Pvt. Ltd.

A couple of other funds including the Special Undertaking of Unit Trust of India will get an
opportunity -- whether they use it or not -- to exit from their decade-old investments in Gujarat
Pipavav Port when the company lists its shares after the public offer.

The Special Undertaking of Unit Trust of India’s investment dates back to August 2000 when the
erstwhile UTI had bought shares worth `32 crore in the company at `80 a piece.

New York Life International India Fund (Mauritius) Llc also invested at a price of `80 a share in
October 2001. New York Life and special undertaking of Unit Trust of India hold 4.7% and 1.3%,
respectively, in the company.

In 2005, an infrastructure fund from IDFC Private Equity Co. Ltd, IL& FS Private Equity and Jacob
Ballas Capital India Pvt. Ltd had invested in Gujarat Pipavav at `40 per share. Even these entities
will not make substantial gains in the IPO.

Luis Miranda, president and chief executive officer of IDFC Private Equity, said: “We don’t have a
lock-in. But we don’t intend to exit the investment as we are confident about its growth prospects.”

Source: Livemint