Mumbai, Nov. 2: The Pied Pipers are now facing the music.

Over the past two years, global private equity funds had gone on a buying spree and picked up stakes in a swathe of companies through PIPE deals. The acronym stands for private investment in public equities.

But the carnage in the markets, which gouged out 63 per cent of the sensex value in less than 10 months, has rocked private equity funds — the Pied Pipers — who had a charmed existence for several years during which they raked in big bucks.

The situation has got so worrisome that the global chief operating officer of one of the world’s largest private equity funds — which is already mired in trouble at home in the US — had to pencil in a visit to India into his hectic itinerary recently.

Unlike the foreign institutional investors (FIIs), the PE funds have not cut their losses and run.

Result: they are losing anywhere between 30 per cent and 85 per cent on their investments in listed Indian companies with a few exceptions.

For instance, Warburg Pincus has seen 58 per cent of the value of its investment in ICICI Bank evaporate into thin air. Apax Partners has watched its investment in Apollo Hospitals melt by 36 per cent.

General Atlantic has lost nearly 60 per cent of its investment in Infotech Enterprises. Others have made larger paper losses (see chart).

Faced with such troubles in the sub-continent, these big funds seem to have little choice but to wait.

Little choice

“Promoters don’t really have the money. The markets are illiquid and non-compete clauses will prevent them from selling out to competitors. While funds can exit and put the money elsewhere, most players will not sell at these absurd prices and take huge losses,” says Ernst & Young director (transaction advisory services) Jayesh Desai.

Indeed, the funds are not desperate to exit. “Most PE firms will have time to recoup (their losses) in India as a bulk of the large PIPE deals were struck in the last two years with a three to seven year horizon. So, they are likely to wait till 2010 before they exit,” says Venture Intelligence’s founder and CEO Arun Natarajan, who tracks the private equity market in India.

However, the experts say PE activity in India is likely to slow down in the next six months.

“It seems a little unreasonable to expect the headquarters to sanction big PIPE deals at a time when potential losses from existing deals are mounting,” says a private equity executive who has been operating in India for over a year.

The mayhem on the markets is not just impacting investments in listed companies but also unlisted ones that have put off plans to float IPOs in the present environment.

According to data collated from Venture Intelligence, private equity firms invested about $3 billion in 116 Indian companies during the quarter ended September 2008 compared with 15 deals totalling $4.2 billion during the same period last year.

So, what are the lessons from this carnage for PE funds investing in India?

Rajeev Gupta, Carlyle group managing director and head of its India buyout team, says, “It is about paying premium valuation for best in class companies.”

Carlyle is one of the few PE firms that has struck a PIPE deal in India and not been hit badly by the falling sensex. It has recorded a 2 per cent increase in absolute returns from its $650-million investment in HDFC.