It is time to sit up and take notice.
First, global private equity giant Blackstone picked up a 50.1% stake in textile company Gokaldas Exports on 21 August, buying out the founding family, to be followed by a mandatory 20% open offer to other shareholders. Blackstone earlier bought a controlling stake in outsourcing firm Intelenet Global Services.
Second, two of India’s largest private equity (PE) firms, ChrysCapital Investment Advisors India and ICICI Venture Funds Management Company, have begun talking about buyouts more emphatically than usual.
ChrysCapital said last month that buyouts could constitute one-fourth of investments from the firm’s new $1.25 billion fund. Buyouts are not new to ICICI Venture Funds—it has done four so far—but the firm thinks that in three years, buyouts or controlling stake deals will overshadow minority deals in this market, certainly in terms of dollars invested.
This flies in the face of the usual assumption that Indian promoters are unlikely to give up control of “their” companies to the new kings of global capitalism. It is perhaps the growing potential for buyout deals that has brought some of Wall Street’s biggest leveraged buyout (LBO) shops to Indian shores in recent times—Blackstone Group LLP, Providence Equity Partners, Kohlberg Kravis Roberts (KKR) and Carlyle Group, for example.
But of the 10-odd deals we’ve seen so far, only one has been an LBO—ICICI Venture’s 2005 ACE Refractories buy. Mature buyout markets, such as North America and Europe, are typified by LBOs.
The reason: These economies are dominated by businesses with flat growth rates. LBO shops usually target companies that want to unlock value by either selling a part or the whole business. Since these are established businesses, PE firms bring in 20-30% of the money as equity and then use the target company’s balance sheet to raise money from banks to finance the rest of the buy. Such situations (KKR’s 2006 acquisition of Flextronics’ Indian IT assets does not count because the deal was done offshore in the US) do not exist in the Indian market yet, for two reasons. One, most businesses here are still in the emerging stages and growth rates average 30% a year. Two, the debt markets are not deep enough to absorb such deals.
What does exist, however, are opportunities for “growth buyouts”. That might sound like a paradox. But explore deeper and it makes sense. Most of the industries in which buyouts have taken place—foods and beverages, retail, logistics, pharma, IT-enabled services, textiles—are still relatively young sectors and need equity capital to sustain high growth rates.
In such growth industries, there is less opportunity to restructure a business, a pre-requisite for LBOs. So, a PE firm, even if it owns a controlling stake, will have to play the role of an enabler but stay out of day-to-day operations— as it would in a traditional investment.
It is important for PE to play this role well and with caution because if it does not, the potential environment for LBOs could spoil. Blackstone’s recent deals, where it will operate as an arm’s length shareholder, for now, is an example. But there’s no doubt that while LBOs are some time away, the environment for growth buyouts is more than conducive. Again, there are a couple of reasons for this. First, family-run businesses, which make up a large portion of the mid-market segment, which in turn accounts for 60% of deals, now want to monetize their wealth by diluting their stakes. Often, the second generation wants to sell traditional businesses to unlock capital for investments in new businesses. Second, larger companies, including multinationals, are beginning to shed their non-core assets.
Let the games begin.
Will India see more private equity buyouts? Write to us at email@example.com