Global private equity’s (PE) platinum leveraged buyout (LBO) firms have started arriving in India with plans to grab a slice of the country’s booming PE market.
By March 2008, at least five of the world’s Top 10 LBO shops are expected to have teams on the ground here, according to executives in Mumbai’s PE circles. This is the second influx of foreign PE investors, led by US firms, into the country in the last three years.
Recent moves by some of these firms indicate that the appetite for India is growing. Providence Private Equity Partners Llc., which specializes in media, telecom and technology buyouts, set up an office in Delhi in January. European buyouts major Apax Partners opened its office in Mumbai last November—India head Neeraj Bharadwaj moved from its New York offices to head the outfit. Cerberus Capital Management Lp. chairman John W. Snow is slated to visit later this year as a precursor to a direct presence. Kohlberg Kravis Roberts & Co. (KKR) is actively scouting for deals to follow last year’s $900 million buyout of Flextronics Software Systems. And others such as Thomas H Lee Partners Lp. and Bain Capital Llc. have been sniffing at deals here.
Key PE-Backed Buyout Deals in India (Graphic)
The investment strategies that will initially be adopted by most of these players in India will be very different from their strategies back home. Most will come in as growth investors and use the next few years to establish their credentials. Providence, for instance, concluded its first deal two months ahead of opening its Delhi office—it bought 15% in Mumbai-based Idea Cellular Ltd for $400 million. “In the near term, the opportunities will be principally growth capital and minority stakes driven,” said Biswajit Subramanian, MD, Providence India.
Subramanian will relocate to Delhi in a few weeks from New York. These investors see LBOs and management buyouts (see ‘Buyouts explained’) emerging as inevitable PE investment asset classes in this market in about three years and want to be well prepared to ride the wave when the market turns.
“As transactions become larger and more complex, we will see a lot more of US funds coming in,” said Atul Mehta, partner at audit firm Ernst & Young India Pvt. Ltd. “All the bigger funds are actively looking at India, including traditional buyout funds.”
LBOs are typical to traditional PE markets, notably the US and Europe. The Indian PE scene has been dominated by $10-100 million (Rs40.4-404 crore) investments that lead to a minority stake in a company.
For buyouts to take off, a couple of factors need to be in place. First, promoters of companies have to be willing to sell . This, say investment bankers and executives at PE firms, is beginning to happen. A growing number of promoters no longer fears dilution of minority stakes, spin-offs or even outright sales. Second, the domestic debt market has to be able to support complex deal structures. So far, this part has been inconsistent, say bankers. However, evidence that the market is changing, albeit slowly, can be found in the handful of buyouts that have taken place in recent months.
This June, New York headquartered Blackstone Group Lp. backed a $200 million management buyout at Intelenet Global Services, and picked up an 80% stake in the business process outsourcer.
For firms such as KKR, Providence and Apax, the opening up of the Indian and other emerging Asian markets offers an attractive alternative to their traditional markets. Returns in traditional markets have begun to taper off and many of these firms have also come under intense criticism for their aggressive buyout and the so-called asset-stripping practices. Yet, these firms come to the country two to three years after peers such as Blackstone, Carlyle Group Llc., Temasek Holdings Pte. Ltd and TPG-Newbridge Capital (an affiliate of Texas Pacific Group) who are sharpening their own buyout game plans. In addition, home-grown players such as ChrysCapital Investment Advisors India and ICICI Venture Funds Co. and foreign veterans such as Warburg Pincus and Citigroup Venture Capital, who have far superior on-ground networks and expertise, will be formidable rivals.
Private equity (PE) investors typically participate in two types of buyouts—leveraged buyouts (LBO) and management buyouts (MBO).
A PE-backed buyout deal simply means that the PE investor takes a controlling stake, anywhere from 50% to 100%, in a company. It will subsequently replace the existing management team.
In an MBO, the PE investor will usually help the existing management of the company to buy out the promoters. In return, the PE investor will take a majority stake.
An LBO is a slightly different animal. In such deals, a large portion of the cost of acquiring a company is financed by debt. The normal ratio is 70% debt and 30% equity. The PE investor will normally bring in the 30% equity and leverage the company’s assets as collateral to raise the remaining 70% from the debt markets.