‘Value of private equity investments dipped 60-70 percent in 2008′

December 30th, 2008 - 4:08 pm ICT by IANS  

Mumbai, Dec 30 (IANS) The value of investments made by private equity (PE) firms in 2007 were eroded by a whopping 60-70 percent or nearly $2.25 billion over the past few months amid turbulent economic conditions and falling stock markets, a study says.Of the 63 deals involving PE investment in 2007, a whopping 92 percent or 53 deals saw the investments losing value, said the report by SMC Capital, one of the country’s largest share brokerage firms.

“Private equity firms lost about 60-70 percent of their investment-worth with the capital markets losing steam and economic conditions worsening,” said Jagannadham Thunuguntla, head of the capital markets arm and director of SMC Capital.

“Continuous downfall and rough market conditions were the primary reasons for this huge capital erosion,” Thunuguntla told IANS.

The overall return on investment in public companies reflects a loss of $2.24 billion on a total investment of $5.29 billion made in 2007. Current valuations of private investments in these companies stand at $3.05 billion as in December 2008, said the SMC Capital report.

Of the total investments across nine industries surveyed by the firm, only one - telecom - proved lucrative with capital invested appreciating 9.6 percent over the past year. About $1.3 billion invested in the telecom industry rose to $1.42 billion by December.

The other eight industries turned out to be wealth destroyers and among them retail investments took the hardest hit, losing 91.43 percent of their value.

“Losses have been all-pervasive, which shows that these companies were over-valued when the bull market frenzy was on,” added Thunuguntla.

Stock prices of retail companies also imply the tremendous pressure such businesses are facing in the wake of weakened consumer confidence. The scrip of Vishal Retail, which was trading on a 52-week high of Rs.1,001 in January, was down to about Rs.88 Dec 29.

IT and IT-enabled services, real estate, media and manufacturing were some of the other sectors that turned out to be poor investment avenues. Of these, the first two were the worst performers, with all 15 investments made in these two sectors coming a cropper.

PE firms bought into these companies at high valuations in 2007 but lost out during the course of 2008 owing to destructive market conditions, with only five deals yielding profits.

There might be more bad news in store for PE firms if the liquidity crunch in global markets doesn’t ease up.

“Firms which are owned by banks and other financial institutions may be forced to sell at a loss if their parent entity is faced with a cash crunch,” Thunuguntla said.

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