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Hedge funds feast on pre-IPO placements

Private equity funds will soon have competition from hedge funds in the booming domestic market. Hedge funds, which are private investment funds typically open to only a limited number of investors, have in recent months become quite active in pre-initial public offer placements.
Some of the deals clinched by hedge funds in India include the $28 million investment by the US-based hedge fund Galleon Group in the recently-listed Firstsource Solutions; DE Shaw's $8 million and $40 million investments in Amtek India and Crest Animation; and Farallon's over $50 million investment in Indiabulls' subsidiaries — Indiabulls Credit Services and Indiabulls Housing Finance.
The hedge fund promoted by billionaire investor George Soros, Quantum Fund, has bought minor stakes in real estate developers Ansal Properties and Anant Raj Industries. Quantum and another hedge fund Blue Ridge invested $33.33 million in the Delhi-based Fortis. 

Some of the deals clinched by hedge funds in India 
Fund  Target
(in $ mn)
Galleon Group  Firstsource Solutions 28
DE Shaw's  Amtek India  8
DE Shaw's Crest Animation 40
Farallon's  Indiabulls subsidiaries  50+
Quantum Fund Ansal Properties Anant Raj Industries   
Quantum & Blue Ridge  Fortis 33.33
“I think hedge funds are winning more deals than earlier as they give better valuations for promoters. Compared with private equity funds, hedge funds are less demanding. Companies, which are looking for funds ahead of their IPOs, also prefer hedge funds to the private equity funds as the higher pre-IPO price becomes a benchmark price for the IPO,” said Arun Natarajan, founder and CEO of Venture Intelligence, which tracks private equity investments in the country.
Industry watchers say the domestic markets could expect several more PE-like deals in the coming months as hedge funds are raising multi-million India-specific funds.
Consider this: US hedge fund New Vernon already has a $750 million India-specific fund; New York hedge fund Old Lane Partners has $ 500 million dedicated to Indian investments and Warburg Pincus co-head in India Puluk Prasad, who recently quit, is floating an India-specific hedge fund to be managed from Singapore. New York-based Tiger Management is another hedge fund which is looking at private equity investments in Indian companies.
JustDial, the Mumbai-based directory assistance company, is reportedly close to getting $15 million from Tiger Management. New Vernon has made private equity investments in Jagran TV and B. Seenaiah & Company (Projects) Ltd, an Indian construction company specialising in major highways and irrigation projects in India.
Nitin Deshmukh, head of private equity at Kotak Mahindra, said hedge funds were emerging as a big challenge for private equity funds in India, but added that only PE funds would have the kind of patience required to hold on to their investments for a longer period of time.
“Only time will say whether hedge funds have the patience to stay invested for a longer period of time,” Deshmukh said. “Most of the hedge funds investments are through pre-IPO placements,” he said.
Natarajan of Venture Intelligence said hedge funds also provide exit liquidity for existing stakeholders in a company. A case in point is when Galleon bought shares in Firstsource Solutions by buying ICICI Bank's stake, just before the company launched its IPO.
“Hedge funds act like a mezzannine finance for companies, before they go for IPOs. Hedge funds also go for pre-IPO equity buy to get an initial prop at the time of listings,” he said.
Mezzannine finance comes as a second stage finance for companies in between the seed capital and the funds raised through an IPO.
Industry observers also noted that a quick exit by hedge funds are ruled out because of the stringent regulations by the Securities and Exchange Board of India. As per the regulations, PE investors are required to hold on to their investments for at least a year.

Source : Business Standard

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