Mumbai/New Delhi: Private equity (PE) activity may be rising in India, amid expectations that it will return to the $10 billion (Rs47,300 crore) levels of the past, but buyouts are yet to become a part of the Indian PE landscape. Even the presence of buyout giants such as Blackstone Group Lp, Carlyle Group and Kohlberg Kravis and Roberts Co. has made little difference.
There have been some transactions involving a majority stake, but these are few and far between. According to a July 2009 report by SMC Capitals Ltd, transactions involving a controlling stake accounted for only 6% by value of the total PE deals in India between 2005 and the first half of 2009.
Even limited partners (Lps) that invest in PE funds are waiting to see a proof of concept and are not convinced about buyouts in India.
“The thesis of such transactions have to be proved and we see more buyouts happening only over the next three to five years,” said Anubha Shrivastava, managing director, CDC Group Plc, which is the development finance arm of the UK government.
The risk-return equation makes Lps favour growth equity or sub-$50 million deals, which is another factor that has hindered buyouts.
Graphic: Yogesh Kumar/Mint
“Lps typically expect 10x return (10 times return on their investment) for deals below $10 million; 3x-5x for ones between $10 and $50 million; and a doubling of their investment for deals above $300 million,” said Ranjit Pandit, managing director, General Atlantic Llc.
“It’s that much harder to squeeze out returns with big ticket sizes,” he said. “So, to do buyouts...it’s a tough environment. The value is in growth.”
In early July, PE firm 3i Group Plc closed down its buyout division and merged the team with its infrastructure unit. “3i has a history of investments in infrastructure plays and given the action of PPP (public-private partnership) in this space, it makes sense to move the team there till buyouts happen,” said Ashish Iyer, partner, Boston Consulting Group (India) Pvt. Ltd.
According to him buyout activity is low not just in India, but across the Asia-Pacific region, except in Australia. Buyout funds run by Candover Investments Plc and Merrill Lynch and Co. have shut in Asia, due to the dearth of large deals, Iyer said.
A report by Bain and Co. co-produced with the industry lobby, the Indian Venture Capital (IVCA) and Private Equity Association, said the acquisition of minority stakes will remain the norm in transactions, but that investors see the number of deals involving a controlling interest of 50-100% rising to 13% by volume in the next two years from 8% two years ago.
According to Sanjay Sakhuja, managing director and chief executive, Ambit Corporate Finance Pte Ltd, “when there is an M&A (mergers and acquisitions) play, there are few buyout opportunities left.”
This has led to some funds changing their India strategy. KKR, for instance, has made some growth equity transactions and invested in companies such as Dalmia Cement Ltd, Café Coffee Day Holdings and the privately-held investment firms of Analjit Singh. And Carlyle’s buyout fund has invested in Housing Development Finance Corp. to tap the robust financial services sector. Akhil Gupta, chairman and managing director of Blackstone Advisors India Pvt. Ltd, said in an end-June interview that there are few buyout opportunities now. “Of the 10 deals we have done this year, three were buyouts. But I doubt there would be three more buyouts in the next 10 deals we do,” he said at the time. “Entrepreneurs see what we see. They see that the value of the company will grow two to three times in five years. So why should they sell now?”
Blackstone was one of the first global buyout firms to enter India, its most notable buyout being that of Gokaldas Exports Ltd. There’s a theory among some PE executives that buyouts are also uncommon in India because promoters are emotionally attached to their businesses and most companies are family-owned. But this doesn’t ring true as businesses abroad are also overwhelmingly family-owned. Research by Raveendra Chittoor and Ranjan Das, faculty at the Indian Institue of Management-Calcutta, in 2007, titled, Professionalization of Management and Succession Performance, showed that family businesses constituted a majority across the world and that 35% of the equity of the top 500 firms in the US was owned by founding families.
An M&A banker who did not want to be identified offered a possible reason for why things were different in India. Some Indian families make more money from their companies than is reported, which makes going public, or doing buyout deals, difficult. The banker said that those who run the companies want to be compensated for this as well, which is something the PE firms can’t do.
PE investors are also hesitant about buyouts because of the managerial talent they need to run companies after acquiring them. That situation will improve, according to Vikram Hosangady, executive director, KPMG India Pvt. Ltd. “Professional talent will move towards PE houses which will offer them operating bandwidth to do buyout deals in India,” he said.
Some are also hiring operating partners who have had success running businesses. Blackstone India has hired Richard B. Saldanha, who worked for 30 years at Unilever Plc. Baring Private Equity Partners India Ltd has taken on Ajith Singh Karan, reputed for handling the mosquito repellent brand All Out for SC Johnson and Son. TVS Capital Funds Ltd has hired D. Sundaram, former chairman and managing director of Hindustan Unilever Ltd.
Globally too, buyouts aren’t what they used to be. According to a January 2010 survey by UK-based research firm Preqin, the gap between the equity capital being spent by buyout firms and the total deal value is significantly narrowing, suggesting a drop in the levels of leverage funding being used to finance deals.
With many banks becoming more risk-averse than in the past, it has become difficult even for bigger firms to undertake leveraged buy-outs. As a result, investors are far more hesitant to commit to the largest funds, with mid-market and smaller buyout funds more appealing.