Last week when New York-headquartered Blackstone Group Lp. bought a controlling stake—50.1% plus 20% pending open offer—in Bangalore-based Gokaldas Exports Ltd, the Indian private equity (PE) market counted its 10th buyout deal till date. Blackstone India chief Akhil Gupta was candid enough to say that he didn’t go into the deal thinking ‘buyout’ but it turned out that way later into negotiations.
The sceptics may disagree—I have to admit that I was among the sceptics when Blackstone said it would do buyouts here when it set up in 2005—but there’s no doubt anymore that the tide is turning in favour of buyouts. The turn is credited not so much to the PE community but to changing promoter mindsets. Selling controlling stakes to PE investors is far more acceptable today than it was three years ago. We can’t say, of course, that India is now a buyouts market. Growth deals will continue to constitute two-thirds of deals since most companies in most sectors are still relatively young. But, astute PE investors will start doing more control deals if they play their cards well.
Sure there have been deals in the past that didn’t play out quite as happily as expected. Take the case of Mumbai-based ICICI Venture Funds Management Co.’s 2003 buyout of the erstwhile Tata Infomedia. When ICICI Venture managing director and CEO Renuka Ramnath called a press conference to announce the deal, the Infomedia management, led by vice-chairman and managing director Hoshang Billimoria gave it a miss. Reason: Billimoria and team had tried to mount a management buyout backed by Citigroup but failed. Billimoria, followed by most of management, quit a year later. What was missing in the deal when ICICI Venture won the bid was that the management had no skin, i.e. equity stake, in the company.
Subsequent deals demonstrate that PE investors have been careful not to repeat past errors. A year after the Infomedia deal, UK investor Actis Capital Llp. backed a management buyout of ICI India Ltd’s nitrocellulose manufacturing unit and formed Nitrex Chemicals India Ltd. Actis went on to do three more buyouts. ICICI Venture itself went on to push through the country’s first successful leveraged buyout deal—ACE Refractories Ltd in 2005, which it sold this month for Rs550 crore on an investment of Rs100 crore. And in June, Blackstone backed a management buyout of Mumbai-based Intelenet Global Services Pvt. Ltd.
Now none of these deals, apart from ACE Refactories, resemble buyouts prevalent in mature PE markets. The practice there is leveraged buyouts—PE investors put in 10-30% of the cost of acquisition as equity capital and borrow the remainder from banks by leveraging the acquiree company’s assets as collateral. Those deals are at least 10 years away in India. There are a couple of reasons. First, leveraged buyouts flourish in an environment of distressed asset sales in sectors where growth rates have flattened. In India, most sectors are growing at 20-30% annually. Second, banks, who lend to leveraged buyout investors to finance such deals are not yet comfortable doing the same here. But, judging from my conversations with several PE honchos in Mumbai last week, they’re happy to wait 10 years. Meanwhile, growth buyouts, as J. M. Trivedi at Actis, dubs them, will keep investors busy.
Snigdha Sengupta is Mint’s resident expert on private equity and venture capital. Comments and questions are welcome at email@example.com