Photo: Mint
Photo: Mint

PE funds increasingly looking for buyout deals

Twenty private equity funds have concluded control deals worth $2 billion this year, closing in on the highs of 2013

Private equity (PE) funds in India are increasingly seeking majority control in companies for a greater say at the time of selling their investments.

Twenty PE funds have concluded control deals worth $2 billion this year, closing in on the highs of 2013 when $2.24 billion in such deals were struck across 23 transactions, according to data from VCCEdge, the financial research platform of VCCircle.

“It provides fund managers with greater control on their exits. Globally, too, in the US and Europe, PE deals are generally control deals. Over the last 15 years, even the Indian PE industry has matured enough to do control deals," said Ashutosh Maheshwari, managing director and chief executive of Motilal Oswal Investment Advisors.

Maheshwari added that growth capital deals have nearly dried up in the country. As companies have matured, a lot of promoters are no longer keen to run the businesses and are open to ceding control, giving PE funds an opportunity.

One of the largest majority control deals this year has been Blackstone Advisors India Pvt. Ltd’s acquisition of Intelenet Global Services Pvt. Ltd for $384 million. Other funds that have carried out majority control transactions this year include KKR Asian Fund II LP, Fairfax India Holdings Corp. and Everstone Group, among others.

Such transactions may continue to rise, with a number of PE firms raising new funds, indicating that they will look at buyout or control deals.

In August, Mint reported that domestic funds, including ChrysCapital, Everstone Capital Advisors Pvt. Ltd, Multiples Alternate Asset Management Pvt. Ltd and Aditya Birla Private Equity, are all looking to carry out more buyout transactions as part of the new funds they are raising this year and the next.

“The fact that pension funds and other limited partners, or LPs, are looking to do deals directly is changing the PE landscape in India. Also, funds are shrinking the amount of LPs they engage with, allowing more capital for fewer funds, which will eventually find its way into bigger deals in the form of control and buyout situations," said Sanjeev Krishan, partner and leader for private equity and transaction services at PricewaterhouseCoopers India.

The key reason for the shifting preference towards buyout deals appears to be the ease of exits. PE funds in India have found it tough to exit in the past and hope that having majority shareholding in a firm will give them a stronger hand vis-à-vis the promoters.

“In majority control situations at least, exits are under control of PE firms and they can exit at any opportune time, which is not the case in minority situations. Most PE funds have found it difficult to exit their investments where they have minority stakes and none of the funds is keen on doing secondaries in these situations," said Motilal Oswal’s Maheshwari.

Incidentally, some of the largest exits this year have been from control deals struck in the past.

This includes Blackstone’s sale of its cash management company CMS Info Systems to Barings Private Equity Asia for an undisclosed amount. Other deals include retail brokerage Sharekhan Ltd’s sale to French banking firm BNP Paribas SA for nearly 2,200 crore by a clutch of PE funds such as Barings Asia and The Rohatyn Group, which controlled the firm.

PE funds including Everstone Capital, World Bank arm International Finance Corp. and Anand Rathi Financial Advisors Pvt. Ltd also managed a successful exit from their investment in Global Hospitals for 1,284 crore when the asset was sold to Malaysian heathcare major IHH Healhcare Bhd.

To be sure, buyout deals are not easy and funds are restricting themselves to sectors where they have some operational expertise.

“The Indian private equity market has matured and there is a considerable increase in the number of buyout investments over the last two years. However, managing buyouts require strong operational execution capabilities with a strategic mindset," said Dhanpal Jhaveri, managing partner (private equity) at Everstone Capital Advisors.

To build this expertise, funds are expanding their teams and bringing sector experts on board.

“We have infused half of our capital in majority control situations. A large proportion of our management team has significant operational ability and we run businesses we understand like telecom, pharmaceuticals and education," Parag Saxena, general founding partner and chief executive officer, New Silk Route, said in an interview earlier this week.

Some of the sectors where such transactions are concentrated include real estate, financial services and the broader services industry. Buyout deals are still rare in the manufacturing sector.

“Private equity buyouts in the Indian manufacturing sector are rare. The reasons are simple. Firstly, India is just not cost competitive in manufacturing compared to its Asian neighbours; secondly, new product and technology development investments that could be a source of scale and value creation in manufacturing are almost absent in India," said Raj Kataria, co-founder and director at Arpwood Capital Pvt. Ltd.

“Most of the buyout PE capital in India flows to the services sector, where India is competitive. We will continue to see this trend continuing unless the government of India steps in with massive deregulation and market economy reforms," Kataria added.

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