U.S. private equity firms Carlyle Group and Warburg Pincus took advantage of India's recent stock market gains to pare stakes in two financial companies in deals worth USD 440 million, a sign of investor wariness about the sustainability of the current rally.
Carlyle sold a quarter of its stake in top mortgage lender, HDFC , two sources with direct knowledge of the matter said, raising about USD 270 million and nearly doubling money from a 2007 investment.
In an unrelated deal, Warburg Pincus sold about 17.5 million shares in lender Kotak Mahindra Bank Ltd through stock market deals to raise about USD 170 million, three sources with direct knowledge of the matter said.
The two block deals came after the BSE Sensex <.BSESN> rose 11% in January, its first rise in three months, and the best month since September 2010. It was the best January rise for the index since a 19% rise in 1994.
India's stock market dropped nearly 25% in 2011, making it one of the worst global performers and leaving few options for private equity firms to exit from their portfolio companies either through IPOs or block deals.
"We will definitely see more and more exits. Perhaps most of the investments that are more than three years old, if the stock market rally continues," said Vikram Utamsingh, head of private equity advisory at KPMG in India.
Temasek Holdings and Singapore sovereign fund GIC are looking to sell a part or all of their holdings in ICICI Bank Ltd , India's second-largest lender, local media recently reported.
Temasek owns 3.5% in ICICI Bank, which is valued at roughly Rs 3600 crore. GIC has a 1.8% stake in the bank that has a market value of Rs 1850 crore. according to Thomson Reuters data.
"We will see more blocks and follow-on share sales in the first half of this year than IPOs," said the India equity capital markets head at a European bank in Mumbai who was not authorised to speak to the media.
Private equity exits through the Indian IPO market dropped 66% last year to USD 85 million in 15 deals, according to data from industry tracker VCCircle.com.
KPMG expects that roughly USD 95 billion in Indian private equity investments made during the bull market years of 2006 to 2008 will come up for sale over the next three years.
Elsewhere in Asia, investment banks are counting on sales of large blocks of stocks by institutional owners to bolster dwindling underwriting fees and spark the region's equity capital markets back to life.
Block trades are faster for an investment bank to execute than an IPO and very lucrative as fees are about the same of an initial offering, with the key difference being they get done in hours as opposed to several months it can take to complete IPOs.
"There's lots and lots of interest in sponsor selldowns and blocks. There's a lot of activity there and where we will focus most of our time," said an investment banker at a top international firm in Hong Kong.
Doubling Money
Carlyle, which owned about 5.2% of mortgage lender HDFC, making it the No. 2 shareholder after Citigroup with 8.8% stake, sold about 20 million shares at an average Rs 677.25 apiece, one source said.
The Washington-based private equity heavyweight will retain nearly 4% of HDFC after the deal. The exit is the first from the Indian market by Carlyle Asia Partners, a buyout fund, a source said.
At the current price, Carlyle has nearly doubled the return on its 2007 investment, one source said. Deutsche Bank was the sole manager of the block deal, sources said.
In June 2011, Citigroup sold a 1.5% holding in HDFC. The sale was done ahead of the adoption of a global accord on banking that discourages large holdings by banks in other financial institutions.
In the second deal, Warburg Pincus sold 17.5 million shares in Kotak Mahindra, which represent 2.4% of the bank's outstanding equity, at Rs 490 each, said the sources who declined to be identified as the matter was not public yet.
Warburg Pincus, which manages about USD 30 billion globally, held nearly 6% of Kotak Mahindra, stock exchange data showed, before the block deal through two investment vehicles.
A spokesman for Kotak Mahindra Bank in Mumbai declined to comment on the deal. Warburg Pincus officials in India did not immediately respond to calls for comment.
Shares in HDFC, which the market values at roughly USD 21 billion, ended down 1.3% at Rs 688.90, while the main Mumbai market <.BSESN> rose 0.6%. Kotak Mahindra gained 2.5% Rs 510.95.
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