Mumbai: Buyout activity is on the upswing and set to stay so if recently released data on deals is anything to go by. The trend highlights the fact that Indian company founders are no longer leery of selling their businesses or ceding control.

Buyouts showed strong momentum in the first six months of 2016, with the total number of deals and deal value at 14 and $2.44 billion, respectively, data from private equity (PE) and venture capital database Venture Intelligence show. Buyout deal value more than doubled from $1.14 billion in the same period last year.

The key sectors that contributed to the increase are information technology (IT) services, financial services and healthcare.

The top buyout deals of the first half of 2016 included Blackstone Group LP’s $1.1 billion acquisition of a majority stake in listed IT firm Mphasis Ltd, Kedaara Capital and Swiss private equity (PE) firm Partners Group’s purchase of mortgage lender AU Financiers for around $140 million and Abraaj Group’s $221 million deal to buy Care Hospitals.

According to industry experts, a number of enabling factors—from a change in the traditional mindset of company promoters to a larger availability of operating talent—are falling into place, driving the buyout trend.

“Over time, promoters are becoming rational about these decisions. Lifestyle decisions and succession issues are some reasons on the promoter side that are leading to a lot of promoters willing to cede control of businesses," said Mayank Rastogi, partner, PE and transaction advisory services at EY.

More funds are increasingly looking at buyouts as there is a larger availability of professional management teams to run businesses. “While earlier it was difficult to get operating management teams in India, today a far bigger management pool is available. As more businesses professionalize, there is an emergence of a second tier of professionals who can take over from promoters," said Rastogi.

Some of the action is also being driven by banks and lenders which are now proactively pushing distressed firms to sell some of the assets or entire businesses, he said.

Exits slowed down in first half of 2016

While 2015 witnessed all-time highs for both PE investments and exits, on the back of renewed interest in India as an investment destination, 2016 got off to a slower start.

PE funds registered 84 exit deals in the first half of the calendar year, worth almost $3.79 billion. Exit activity fell far short of the $5.91 billion worth of exits recorded, across 139 deals, in the same period last year. Overall, 2015 witnessed 254 exit deals translating into $9.3 billion of capital that PE funds returned to their investors.

On the sectoral front, the first half of 2016 (H1 2016) saw manufacturing emerge as the best sector for PE exits, at $1.3 billion. In H1 2015, IT & ITeS (information technology-enabled services) was the best performing sector for PE funds with $2.62 billion worth of exits.

“Overall, from an industry perspective, the first half was slow, though manufacturing sector has picked up. The second half of the year should see strong exit action in sectors such as IT, healthcare and manufacturing as there is a strong pipeline of transactions in these areas," said Deepesh Garg, managing director at investment banking firm o3 Capital.

On the exit route side, trade sales (PEs selling to PEs) will be the main source of exits as strategic interest is not too high right now and initial public offerings of meaningful sizes are still few and far between, said Garg.

India has started looking attractive, but with the global economy slowing in the last six months or so, it will take some more time for strategic investors to firm up their stance on India, he added.

Early stage investments fall from last year’s high

Early-stage venture capital (VC) investments (seed to series B investments) in the first half of 2016 declined to $399 million (across 164 deals), compared with investments worth $644 million (across 194 deals) in the previous year, in line with the overall slowdown in the VC space.

However, the silver lining is that early-stage investment activity was still higher than that in 2014. HI 2014 saw investments worth only $234 million across 103 deals.

The slowdown in early-stage investments is being driven by several factors.

“The downward valuation trend for a lot of the large companies such as Flipkart and others has had an adverse psychological effect on VC funds, and they have become scarce in terms of how much they invest and where they invest," said Farooq Oomerbhoy, founder of FAO Ventures.

Large-ticket investors such as Tiger Global and SoftBank, which used to take bets of $50-100 million, have gone slow, and LPs (limited partners) are asking VCs to be cautious about the valuations at which they are investing. These factors have affected sentiment, he said.

The industry today is marked by a high degree of rationalization, which means start-ups without robust business models are finding it tough to persuade investors to take a bet on their ideas.

“VCs are asking tough questions on business models, unit economics such as operating margins, gross margins and on break even. It is no longer about looking at GMV (gross merchandise value), number of app downloads or site visits," said Oomerbhoy.

IT and ITeS, financial services, energy and healthcare sectors continue to remain PE favourites.

IT services, financial services, healthcare and energy again emerged as the top sectors for PE funds in the first half of 2016.

The IT sector recorded the highest amount of PE investments with 183 deals worth $2.85 billion in H1 2016. In H1 2015, the sector had seen PE funds invest $2.94 billion in 215 deals.

Close