Mumbai: Global private equity (PE) funds are customizing their India strategy keeping in mind the local realities—the relatively small size of companies seeking capital, promoters’ reluctance to cede control, and local takeover regulations, among others.
Their focus is moving from big-ticket transactions, running into a few hundred million dollars, to smaller deals and minority stakes.
According to Sanjay Nayar, chief executive of KKR India Advisors, international funds are now realizing that approaching India with global investment benchmarks may not work. “People are realizing that saying I won’t look at deals less than $200-300 million (Rs930-1,395 crore) can’t take them far in India.”
Manish Kejriwal, Temasek Holdings Advisors India Pvt Ltd, agrees that there is a need for “much more Indianization of global funds in India”.
Temasek Holdings, the investment arm of the Singapore government, is the largest private equity investor in India with at least $3 billion of investment across Tata Teleservices Ltd, Mahindra and Mahindra Ltd, ICICI Bank Ltd, Tata Sky Ltd, INX Media Ltd and Gateway Distriparks Ltd. The deal sizes for Temasek vary between less than $100 million and $2 billion.
Graphics: Yogesh Kumar / Mint
“As we resolve capital structures of Indian companies and add more people, we will be more flexible in deals we do,” said Nayar at a recent private equity conference in Mumbai.
KKR has so far made two investments in India. Its first deal in 2006 for Flextronics Software Systems Ltd, later renamed Aricent Technologies Inc., for $900 million is the largest leveraged buyout in India. In early 2009, it also made a strategic investment of $250 million in Bharti Infratel Ltd, the tower arm of India’s largest private sector telecom player.
During the bull run that lasted till early 2008, when there was plenty of liquidity, big-ticket deals were easy to come by. At least four deals worth $150 million each were transacted in 2007. Blackstone Advisors India Pvt. Ltd. alone signed two of them. These included the $260 million investment in Intelenet Global Services Pvt. Ltd. and $171 million investment in Gokaldas Exports Ltd.
PE investments zoomed from $2 billion in 2004 to at least $14.4 billion in 2007.
But the global economic downturn and financial markets crisis have made investors conservative. At the same time, the market rally this year has raised the valuation expectations of company promoters. In 2009, India’s bellwether stock index, the Sensex, has risen 72.51%.
Funds are now happy to make top-up investments on their existing portfolio and not too keen to strike fresh deals. In September, KKR, along with one of its limited partners, invested $255 million in Aricent, raising its stake from 63% to 79%. Limited partners are funds that invest in PE funds.
Blackstone, too, recently invested $23 million in Allcargo Global Logistics Ltd, taking its stake to 11%, from 5.26%.
Arun Natarajan, chief executive of Venture Intelligence, a Chennai-based research firm focused on PE and mergers and acquisitions, says, “These smart folks have realized this early. If they stick to their stance of doing buyouts only, they wouldn’t find enough deals. Blackstone has already adopted this approach.”
According to Bhavesh Shah, executive director, investment banking, JM Financial Consultants Pvt Ltd, a financial services company, “Every market is different. India is a growth-led market, a buy-in rather than a buyout model. So you need to adapt to meet the market realities.”
According to Natarajan of Venture Intelligence, if the bigger firms are looking to do a $100 million investment, they would need to look at publicly listed companies. But “taking a public company private involves a lot of regulatory hurdles”.
Under the takeover rules of Indian markets regulator, any investor picking up a stake of 15% or more is required to make an open offer to minority shareholders to buy at least 20% additional stake.
PE funds making buyouts also face regulatory hurdles on exit. One of the popular exit routes is IPOs but a firm needs to have a promoter for an IPO. Indeed, a PE fund holding a controlling stake can qualify as a promoter but not many funds favour the idea. According to J.M. Trivedi, partner, Actis Advisers Pvt Ltd, funds are, therefore, forced to make strategic deals. One way to solve this problem could be selling to a larger fund. “More and more PE funds are buying from other PEs,” Trivedi said.
PE funds are under scrutiny from investors because of a perception that they are underperforming the larger markets. A majority 61% of the audience at the PE conference in Mumbai said Indian PE funds had not been able to outperform the stock market. Even more (87%) said that the industry has not been able to give back 25% returns to the investors.
According to Rahul Bhasin, Baring Private Equity Partners (India) Ltd, return expectations will remain high due to the high opportunity cost of capital raised. “Investors in the West get 15-20% returns in distressed debt assets. So when you are looking to convince them to invest, you cannot offer any less.”
Minority transactions form a major chunk of PE deals in India while leveraged buyouts are the common form of PE deals abroad. Between 2005 and the first half of 2009, the total value of PE deals was $41.91 billion, but only $2.52 billion, or 6%, of those were controlling-stake transactions, according to a report from New Delhi-based investment bank SMC Capitals Ltd.