Ability to control exit favours control deals, say PE executives and experts

Buyouts or control transactions are on the rise in India and the trend is only going to accentuate going forward, say panellists at Mint Private Equity Conclave


(From left) Samara Capital founder and MD Sumeet Narang, Advent India PE Advisors MD Shweta Jalan, Actis partner and head (South Asia) Shomik Mukherjee, Bain Capital MD Pavninder Singh, IDFC Alternatives managing partner and CEO M.K. Sinha, Macquarie Infrastructure and Real Assets senior VP Deep Gupta and Trilegal partner Harsh Pais at a panel discussion. Photo: Abhijit Bhatlekar/Mint
(From left) Samara Capital founder and MD Sumeet Narang, Advent India PE Advisors MD Shweta Jalan, Actis partner and head (South Asia) Shomik Mukherjee, Bain Capital MD Pavninder Singh, IDFC Alternatives managing partner and CEO M.K. Sinha, Macquarie Infrastructure and Real Assets senior VP Deep Gupta and Trilegal partner Harsh Pais at a panel discussion. Photo: Abhijit Bhatlekar/Mint

Buyouts or control transactions are on the rise in India and the trend is only going to accentuate going forward, according to speakers at the Mint Private Equity Conclave 2017 held in Mumbai recently.

“Back in 2003-04 control deals were around 5% of the market and today my sense is that they form around 25-30% of the market. Directionally, the market has moved towards more control deals, both on the larger end of the spectrum and also in the mid-market space,” said Sumeet Narang, founder and managing director of private equity firm Samara Capital.

Over the last three years, control deals or buyouts have shown a significant rise in India with controlling stake deals up to 30% of the overall deal value in H12016 compared to about 8% three years ago, shows a survey of over 20 PE firms active in India, conducted by A&M’s Performance Improvement group, Mint reported in December.

According to speakers, the trend towards more control deals is being propelled by several factors.

“There is more openness and less social stigma in selling control in your business. Also there is a recognition that some of the succession challenges can be addressed by bringing in a professional management,” said Shomik Mukherjee, partner and head, South Asia, at Actis.

The sector itself has matured and is today more open to do buyouts, especially in the sectors that it understands, he said, adding that the availability of professionals, who are willing to get out of their comfortable corporate jobs is also helping more buyouts.

Control transactions require investors to have a different mindset to accept the obligations and liabilities that come along with control, however, control also brings along with better control over governance and exits, which are very attractive for investors.

“If you look at infra, when you are in control there are several things that come along. You have sponsor guarantees. You are the named sponsor in concessions, which brings along a lot of obligations and liabilities. So in the obligation sense you have a lot more to be worried about in a control situation,” said M.K. Sinha, managing partner and chief executive officer at IDFC Alternatives Ltd.

However, Sinha added that it is worth carrying the onerous burden of the liability, because you have more control over governance, over exit and one has the ability to appoint management that is up to your standards.

The ability to control exit is a very important factor that favours control deals.

“You have control over your destiny, both in exit and also if something goes wrong on the way, you can course correct, you can change the management. You can do some transformation. In minority, if things are going wrong your ability to course correct is very restricted,” said Shweta Jalan, managing director, Advent India PE Advisors Pvt. Ltd.

Finding the right management team to lead the business post-buyout is very critical, the panel said.

While the availability of professional managers has increased, finding the right people, who will adapt to a small scale business vis-à-vis their erstwhile large corporate or MNC setups, and to keep them motivated and aligned with the private equity interest, remains a challenge.

“When you bring people out of large corporate setups into these buyout situations, they face a lot of challenges. First challenge is a difference in scale. Some of the gilt edge CV people struggle with scale. The second thing they struggle with is that they have not been on the shop floor for many years, they have left that behind. It’s a struggle with rolling up your sleeves,” said Mukherjee of Actis.

Finding people who can get across all of these hurdles while also having the EQ (emotional quotient) to work with the quality of professionals every level below them, which is not what they are used to in a large corporate, is difficult, he added.

According to Deep Gupta, senior vice-president at Macquarie Infrastructure and Real Assets, professionals are willing to move to a smaller setup if they can see the visibility of long-term growth.

“Within infra, people are happy to come down from a large corporate to join a small company, where they can see a growth potential and the capital to drive that growth. Most of our discussions have primarily been around growth,” said Gupta.

The issue of talent, however, will improve as the market for buyouts continues to mature, the panel said.

“I think this is part of the evolution of how the market has to evolve. In developed markets private equity firms buy and sell businesses all the time,” said Pavninder Singh, managing director at Bain Capital.

“You have businesses that don’t have nominated promoters. India doesn’t have a lot of precedence for that, but I think we will get there. It’s part of the natural evolution of the market,” he said.

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