Mumbai: The Japanese bank Mizuho Corporate Bank Ltd, has hired an India head, London-based Sanjay Kohli, for its international leveraged finance business, which is headed by the bank’s only foreign board member Jeremy Ghose. The bank wants a piece of the potential leveraged buyout (LBO) opportunity in India, and expects to play an important part in plugging the gap by bringing in debt to execute such deals.
Kohli said that this was the right time for the company to come to India. “We got the sign that it was time from the private equity firms,” he said, noting the bank’s relationship with Goldman Sachs Group Inc., Blackstone Group, Apax Partners, CVC Capital Partners Group and Carlyle Group. Mizuho will partner with local banks, and is working on an agreement with ICICI Bank Ltd and State Bank of India. It also plans to introduce promoters of companies ready for a leveraged buyout to private equity (PE) firms looking to do such deals.
Leveraged buyouts have not made an appearance in India yet, except for the 2006 Kohlberg Kravis Roberts buyout of Flextronics Software Systems’ Indian assets, which was actually executed in the US. Private equity fund managers and limited partners (institutions which invest in private equity funds) say the debt market is still not deep enough to absorb leveraged deals.
In a leveraged deal, 20-30% of the deal is financed by equity capital and the balance through debt, which is raised by leveraging the assets of the company being acquired.
Although firms have been pushing this model here since 2003-2004, it accounts for just around 6% of private equity deals, by value in 2007, according to year to date figures from UK investor Actis Capital LLP.
And 2008 is likely to see that figure go up for two reasons. First, many PE firms cite Blackstone’s series of buyouts, or controlling interest deals this year as further validation that there is a market, although most are holding out to see it unfold. Second, the various pieces of the eco-system required to make buyouts happen are slowly coming into place. Entrants like Mizuho Bank are one of the critical pieces in that eco-system.
Yet, a buyout market in India and certainly a strong LBO environment is still a long way off, particularly considering the regulatory environment and the ample opportunities for returns for equity-based growth. And those aren’t the only hurdles. On a panel at the Asian Private Equity & Venture Forum in Mumbai, Harsha Raghavan, principal, investment area, of Goldman Sachs (India) Securities Pvt. Ltd, said: “Promoters ask ‘Why should I sell?’”
On the sidelines of the conference, the consensus among PE investors was that valuations have become more of a problem, but that this isn’t a time to be a contrarian PE investor in India.
Many PE firms are still skeptical that there are professionals in the market with both the knowledge of the Indian market and buyouts to do the deals successfully here.
Firms that have pioneered buyouts in India, such as Actis, are preparing for the shift and finding ways to overcome these hurdles.
The firm has brought on board two people with operations experience to help with buyouts.
Delhi-based Steven Enderby, founding partner at Actis, said: “The case for buyouts has never been stronger…I don’t see a better way of making money in this market.”