Loading ...ET has a piece on PE investments slowing down and deals taking more time to close.
The current global meltdown propelled by subprime concerns has left its mark on the Indian market too, which is also evident in the number of private equity deals slowing down.
Industry experts say unlike in the past when term sheets were signed in six-seven days, the duration has now increased to a month. Fund managers are taking a longer time to make up their minds on investments. They are also agonizing over what valuations ought to be. Some are even backing out of deals.
This bit, about players backing out after the termsheet is signed, is especially interesting. Can readers comment if there are more examples in the recent past?
For instance, Indivision, a part of the Future Group backed out of an impending deal with DishTV after signing the term sheet. Sources said, this was because valuations were driven down. Then, sources added, there is the case of General Atlantic Partners backing out of Essar Power, once again, after signing the term sheet.
Hi,
I was wondering if someone can throw some details on legal implications if these PE firms back out post signing the term sheet .. ?
Warm Regards,
SG
Couple other deals that tumbled
ICICI Venture dinked Jaypee Infratech – 10-15% stake for $800 MM
Blackstone dropped out of Ushodaya enterprises (Eenadu Media group) – 26% stake for $275 MM
Saurabh,
Legal implications kick in only if it’s a binding term sheet and the applicant company has complied with all Conditions Precedent outlined and other contractual obligations.
Normally there is a lag after a term sheet is signed in principle and specific approvals are obtained in large deals. In Blackstone-Ushodaya deal, FIPB approval took some time in coming and Blackstone used it to slip out. Had the markets been buoyant PE firms relax these conditions – sort of wink and nod. But now this is hardly the case with the credit squeeze in US, leverage window is no longer available to these firms. So they slither out - just as in any other business.
Saurabh, most term sheets are non-binding on both parties and hence there are no legal implications.
I was talking to another PE friend of mine, and they felt the entrepreneurs had not yet reconciled to the global correction - and that will show up in longer time periods to get deals done.
Saurabh,
Mostly it is non binding and even if binding in a rare case its a long battle to get money from someone elses pocket.
Vyaas
One more interesting aspect of information spreading.
You have written this article. Recession or slow down is under progress. Now this will trigger more people to think cautiously. Now the chaos theory effect will trigger more situation where people will start writing this type of articles on regular basis.
The best part of new information spreading era is slow down and boom time period is reducing down. In earlier century the slow down use be generally more then 3 to 4 years. Now we are talking about slowdown in much smaller time interval. Reason for this is Information spreading speed. The cycle of information distribution has changed dramatically, which lead to smaller and smaller cycle.
May be one day we will see slowdown of single day or single hour type of cycle. heheh
Krish: ICICI finally bought into JP. 1150 cr. with 250 cr. equity and the rest as a loan.
They’ve decided to tranche the fund raising, which is perhaps the way forward for a lot of entrepreneurs who wanted to raise cash.
As for binding term sheets - after the Jet-Sahara fiasco, is anything binding? That thing had problems even AFTER the takeover; back-outs will definitely happen where regardless of number of below-dotted-line-signatures on random pieces of paper, unless the signature is the RBI governor’s, on a special paper with Gandhi’s pic on it.
In the US, PE deals are seeing extreme difficulty in closing. See the clearchannel $19 bn take-private scheme go down for lack of funding. (http://online.wsj.com/article/SB120647527104363151.html)
Also, grapevine info: managers are trying to get debt or mezzanine funding rather than equity, because of current market conditions. This may not be of interest to many VC/PE funds. Convertible debt has now become equity due to regulation, so that’s not an option either.