Mumbai: Private equity (PE) investors are increasingly looking at taking minority stakes of 20% and above in unlisted firms as higher ownership will ensure greater influence on the growth of the company and return on investment.
In November, India’s first and only food and farm-focussed private equity fund Rabo Equity Advisors Pvt. Ltd invested an undisclosed amount for a significant minority stake in Ahmednagar-based Prabhat Dairy Pvt Ltd. Ahead of that, in October, Aditya Birla Private Equity, a part of the Aditya Birla Financial Services Group, invested an undisclosed sum for a significant minority stake in fine dining restaurant operator Olive Bar and Kitchen Pvt. Ltd, which owns the Olive, Monkey Bar, LAP, Ai and Soul Fry brands.
While a majority of PE deals in India are for minority stakes of less than 15%, investors say their experience over the last one decade indicates that being a passive investor is not working in their favour as the promoters don’t care much about their voices while taking decisions. Also, their interests, like access to financial and operational information and liquidity rights, become non-enforceable if their stake is too low.
“In the last 10 years, deals that have been successful in India are those where PE investors had majority or significant minority stakes,” said Bharat Banka, chief executive, Aditya Birla Capital Advisors Pvt. Ltd. In a mid-size company, it’s important to have minimum of 15% to 25% stake along with robust shareholder agreements, including clearly defined rights, returns, exits and liquidity events, he added.
Rabo Equity Advisors will only consider deals where it can get stakes of over 25%. In the mid-market segment, if the investor doesn’t hold a significant minority it becomes difficult to drive growth, said Rajesh Srivastava, chairman and managing director, Rabo Equity Advisors. “How can one bring value and drive growth when they are not even heard, as they are a minority stake holder?” he asked.
Rabo Equity is raising $250 million, its second fund, more than double of its existing $120 million India Agri Business Fund. With a bigger fund, Rabo Equity will look at investing up to $25 million in a company instead of some $10 million in each.
While a few PE firms are keen only on significant minority stakes, others prefer doing both significant minority and majority stake transactions. “Based on our past experience, we are clearly looking at majority or significant minority stakes of at least 25%,” said Darius Pandole, partner, New Silk Route Advisors Pvt. Ltd, which holds significant minority stake in a few firms, including VRL Logistics Ltd.
Pandole said while significant stakes enable the investors to have greater influence on the eventual outcome of an investment, such transactions need to be supported by strong operating capabilities, which would facilitate investee company’s growth and a disciplined focus on sectors where investors have expertise and experience.
Investors say minority stakes can only be considered for mature companies, where there is possibility of liquidity within a year or two. For example, Aditya Birla Private Equity took a minority stake in ratings agency Credit Analysis and Research Ltd in 2010. The company went public this month.
Experts say there are enough opportunities for significant minority stakes transactions for PE investors. “Investees are likely to give more rights in the form of affirmative voting matters to a significant minority partner than to an investor with a small stake,” said Siddharth Bafna, partner and head of the corporate finance and transaction services practice at Lodha and Co., a financial consultant.