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The Private Equity juggernaut needs convertibles | Advantage zyaada

Also, the Infrastructure Financing club under Parekh, separately profiled today..

Sources, Acknowledgements and lingering Paranormal activity []

Please do look out for the next late late post on the Infrastructure Financing club worth $12bn planned with Deepak Parekh supervising the set up. The fund is targeting Sovereign Funds, Private Equity and Sovereign debt issues to fund its corpus. Of the $65bn FDI in South Asia, $26bn has been presented in India Infrastructure Projects according to the World Bank report on south Asia ( see today’s ET and the India Infrastructure fund report)

Banking and Capital Markets followers for the India/South Asia business would find amazing stuff here across Infra, PE and Money that is keeping the Indian dream.

While we got good factual details from the mint story sometime in the second half of May and they remain good for infrastructure, banking and PE it is difficult to pin down who actively identified the trend and who presented the research.., Bloomberg UTV has also taken to providing backhanded complements to mint ( and just talk to us thru TV using mint’s well researched factotums that in fact lasted all of May for its own stories in the Market Analytics section..VCC providing the same analysis to both.

Latest PE Successes and the implications

The first 5 months of 2010 have seen close to $2.6 billion in Private Equity investments and of the $1.9 bn noted in 82 registered deals in Q1, around 55-60 deals have used Cumulative(Compulsory) Convertible Preference Shares to buy stakes in the investee company. The cumulative preference shares are a local India specific success though warrants can be used easily elsewhere around the world. On the negotiating table when promoters expect a larger premium at the time of investing PE finds it easy to convert that ‘hidden value’ into such instruments that allow it to raise stake or otherwise compensate its PE investment if the promoter fails to achieve his promised results towards the end of the 4-5 year period when exit is planned by the fund.

These CCPS instruments are currently counted as debt in FDI computations while as such FDI limits apply across all sources of capital and do not offer any additional short cuts for cutting the caps instituted by GoI.

However one benefit of such transactions within the GoI imposed 18 month limit is to factor in economic certainties and market factors like exchange rates, interest rate scenarios and real performance of the investment appropriately without committing to a higher value for the blueprint right away and without waiting for market success to make a clearer case for profit. Infrastructure and PIPE deals in particular for example get potentially high valuations but $450mn investment in a single project like Asian Genco would still like to discount the political risk or otherwise pay the premium for the value of the project once the political risk is mitigated by execution.

Warrants and Convertible Debt have restrictions on use and time to expiry(the 18 months mentioned above) in the South Asian context as we try to preserve the magic potion recipe that purportedly saved us from surefire crisis with the global biggies. Though conservative regulation has been good in parts, our economic size and our predilection for erring on the side of conservatism keeps most of our institutions afloat. With DCF valuations mandated by our Foreign investment Policy these convertibles can look at prospective price but a two stage valuation may queer deals. According to some PE experts interviewed by mint however, promoters can easily pick up less than 15% equity in the Phase I financing and then comeback for more stakes while triggering the open offer clause in SEBI regulations at a later date closer to market sales.(IPO)

The recent GMR Infra deal with Temasek for $980mn is such Compulsory convertible debt as is Blackstone’s deal with Gateway Rail Freight for $75 mn have also been funded thru the CCPS route.

2 comments on “The Private Equity juggernaut needs convertibles | Advantage zyaada

  1. Pingback: Tweets that mention The Private Equity juggernaut needs convertibles | Advantage zyaada | The Banking and Strategy Initiative --

  2. Kitty Breithaupt
    August 6, 2011

    We are a group of volunteers and starting a new effort in our community. Your post provided us with precious info to assist us get going


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