2017 will have to raise the bar in terms of deal-making. 2016 was about headline-grabbing numbers breaking record highs. Both M&A volumes and dry-powder reserves beat the previous years and it would be safe to assume that 2017 would largely be a year of deployment.
TRENDS TO WATCH
Buyouts to gain further momentum
A significant change both in the mindset of promoters who are now no more wary of selling businesses and also private equity investors leaning towards controlled transactions, has upped the game on buyouts. According to turnaround consulting firm Alvarez & Marsal, control deals have increased to 30% of the overall deal value in the first half of 2016 compared to about 8% three years ago.
Will the Tiger roar again?
Tiger Global Management, the American investment firm, can be credited with having single-handedly put Indian technology start-ups on the world map. Tiger’s investments have helped create home-grown unicorns such as Flipkart, Ola, Quikr and Hike. Throughout 2014 and 2015, Tiger was on an investment spree. However, in 2016, the investor almost completely halted new investments, which had a huge spill-over effect on the funding ecosystem. As Tiger-backed companies such as Flipkart and Ola battle their American rivals, the big question is: will Tiger open up its purse strings to back them and also make fresh commitments.
2017—The year of deployment
Dry powder—the amount of cash with private equity and venture capital (VC) funds—stands close to a six-year high of $7.1 billion, data from private deal tracker Preqin shows. A clutch of established PE fund houses are in the market to raise over $3 billion, while several first-time fund managers too are trying to raise almost $2 billion. These numbers clearly show one thing—that in 2017 Indian PE funds will not be short of money to make new bets. And that is a good thing, because 2016 saw an almost 47% decline in deal value from 2015. 2017 should turn out to be a year of deployment.
Stressed asset sales to take centre stage
With the volume of non-performing assets (NPAs) in the banking system exceeding Rs4 trillion, 2017 could see a large number of deals in the stressed assets space aided by the bankruptcy code and new norms allowing foreign ownership of asset reconstruction companies announced this year. Global stressed asset funds such as Oaktree Capital and Lone Star Funds, that have been actively sourcing deals, are expected to close their maiden deals. Established names like KKR, AION Partners, Edelweiss Financial Services, Piramal Enterprises, SSG Management and Kotak Investment Advisors are expected to close more deals as banks look to clean their balance sheets.
REITs, InvITs to take off in 2017
After having toyed with the idea of real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) for almost a decade, Indian markets are finally poised to see the launch of these products in 2017. Three companies—road developers IRB Infrastructure Developers and Reliance Infrastructure and transmission line operator Sterlite Grid—have filed the draft prospectus for their InvITs that will see them collectively raise over Rs10,000 crore. Private equity fund Blackstone too is gearing up to launch REITs of commercial real estate assets.
PEOPLE TO WATCH
Rajeev Gupta: Veteran deal maker Rajeev Gupta, who founded Arpwood Capital, was behind two of the largest transactions in the investment banking space in 2016—Lafarge selling its India units to Nirma for $1.4 billion and HDFC Life’s merger with Max Life to create India’s biggest private life insurer. Arpwood Partners, the firm’s PE business unit, which alongside Centrebridge Partners had invested around Rs 700 crore last year in Senvion SE, made a twofold return when it sold its stake for close to Rs2,200 crore in the IPO of the German wind energy company.
Anuj Ranjan: Ranjan heads a deep-pocketed private investment firm which at the moment is the most aggressive investor in India’s infrastructure sector. Ranjan has spent a decade with Brookfield, working at the firm’s Toronto office before relocating to Mumbai in 2009 to head Brookfield’s initiatives in India and the Middle East. Under his watch, Brookfield has acquired assets such as Reliance Communications’ tower business for $1.6 billion and Hiranandani Developers’ Powai office assets for $1 billion in 2016.
Prem Watsa: The Indian-origin Canadian billionaire in January 2015 raised $1 billion through his India-dedicated investment vehicle Fairfax India Holdings Corp. In the last 24 months, Watsa has invested over $1 billion in India, across assets such as GVK-owned Bangalore International Airport, ICICI Prudential Life Insurance and Sanmar Chemicals Group. A couple of weeks ago, Fairfax India Holdings said that it would raise an additional $500 million.
Anita George: CDPQ, the second largest pension fund in Canada, with about $255 billion in assets under management, opened its India office in March this year. Anita Marangoly George, managing director-South Asia, has been entrusted with the task of identifying investment opportunities across all asset classes in South Asian markets. The firm has already clinched two large transactions this year—$850-million for power projects in India, and investments worth about $400 million put together in Edelweiss Financial Services Ltd and in TVS Logistics Services Ltd.
Sanjay Nayar: Under Nayar’s watch, KKR India remained one of the most active funds this year. It exited Alliance Tire Group (ATG) for $1.18 billion in the single-biggest PE exit from India in the last decade. Besides, KKR exited its investment in Gland Pharma Ltd too in a deal worth $1.3 billion (Rs8,700 crore). While investments and exits are part of the game, what made KKR stand out is the quantum of credit extended by the private equity major. KKR has now lent nearly $4 billion to Indian companies and real estate developers, partly through two non-bank lending firms it runs, one of which was started last year. The PE firm is now contemplating setting up its own asset reconstruction company—a move which will again be keenly watched.
THINGS TO WATCH
$100 billion tech fund: Japanese internet and telecommunications giant SoftBank Corp. is teaming up with a Saudi sovereign-wealth fund to create a $100 billion technology-investment fund. SoftBank is one of the biggest late-stage technology investors in India and has backed Indian unicorns such as Ola and Snapdeal. Masayoshi Son, the founder and CEO of SoftBank Group Corp., intends to surpass his commitment to investing $10 billion in India.
PE fund hunt: About two dozen private equity industry executives are on the road to raise up to $2 billion for their new funds, on the back of India’s economic prospects over the last 24 months. Some of the fund managers on the fund-raising road include former Carlyle Group India managing director Mahesh Parasuraman, former India Value Fund Advisor partner Sunil Vasudevan’s Amicus Capital and former KKR India director Heramb Hajarnavis’s Sea Link Capital Partners. Will they be able to raise money and bring about the second wave of entrepreneurial fund managers?
GAAR: General Anti-Avoidance Rules, or GAAR provisions which were deferred to 1 April, 2017 will be keenly watched by private equity and strategic investors, especially those using investment structures through Mauritius and Singapore-based entities. GAAR provisions, which will give more powers to Indian tax authorities to examine cross-border transactions citing tax evasion, will be a major area of uncertainty for India-focused fund managers and global investors.
Bankruptcy code implementation: The bankruptcy and insolvency code, which was enacted in 2016, is awaiting enabling regulations and will prove to be the biggest catalyst to consolidation activity. Institutional investors across the world are keenly watching how the first successful resolution under the bankruptcy code is implemented.
Budget: Currently, tax pass-through status is granted only to category I and II Alternative Investment Funds (AIFs) and the industry expects the government to extend it to category III AIFs as well. Easing of the Safe Harbour qualifying norms is another demand from the PE industry. Industry also expects proposals from government with regard to tapping the significant capital pool from pension funds.