Consultants gear up to help PE firms get exits

With private equity (PE) investors looking at monetizing investments made five to seven years ago and 2013-14 expected to mark a record for exits, consultants are turning their attention to strategies that will maximize their returns in eight to 18 months.

add_main_imageThe exercise is aimed at ensuring that the company the PE has invested in, takes on a shine that will prove irresistible to likely prospective buyers of the stake.

KPMG India is in the process of setting up a team that specializes in readying investor-backed firms for exits. The consulting company last month named Vikram Hosangady the head of PE, succeeding Vikram Utamsingh.NextMAds

The new team will work closely with companies in which PE firms have invested, implementing strategies that increase profitability, introduce new technology, reduce costs, emphasize corporate governance and possibly lay the ground for a strategic alliance.

“The focus now is to work a little differently with PE firms,” Hosangady said. “In 2006-07, the focus was on investing. From 2012 to 2015, the focus will be on exits and monetization. We, as a firm, need to be in tune with that.”

The current economic slump doesn’t make things easier. When a business goes through a downturn, promoter morale drops and the focus is on cutting costs. Getting back to a growth trajectory becomes difficult, he said. “Skills required for investments and exits are different,” Hosangady said. “This is not to say new investments are not important but today even PE teams are saying there is no point in fresh investments when monetization is difficult.”

The attempt at changing the orientation comes as a lack of exits is being seen as the biggest hurdle for PE firms in India, with nearly 80% of investments yet to give returns.

PE firms exited across 137 deals for a value of $4.3 billion in 2012 with open-market sales the most favoured route, followed by mergers and acquisitions (M&As) and secondary sales, according to estimates by VCCEdge, which tracks investment activity in the country.

Experts said operational experience and expertise are critical to the PE business model but become even more relevant in times such as this when overall growth is muted. Bigger, global PE funds are different in that they are consistently focused on getting a company buyout-ready, they said. KKR, Advent, Actis, Bain and others are always actively engaged in the operations of the companies in which they invest. sixthMAds

That’s something smaller firms are picking up on.

“Exits experience and shortfall in performance due to economic slowdown has also made other and smaller PE firms realize the need for it,” said Mayank Rastogi, partner, PE and transaction advisory services at Ernst and Young India (E&Y).

The firm is helping companies through various strategies, including revenue improvement, optimizing costs (which helps in saving capital by as much as 15-20%) by working on the supply chain, consumption of key inputs, new product addition, market extension, IT-led improvements and human capital initiatives, Rastogi said.

E&Y, for example, is working with a PE investee that has multiple facilities with varying degrees of performance. E&Y’s work in this case began with profit improvement initiatives identified during the pre-investment phase with an eventual idea of bringing performance of various facilities as close to each other, at industry best standards and improving profitability by 50%.

This is where consultants play a role. “No one PE firm is expected to have all the expertise required in various sectors, more so when they invest across sectors—agri inputs to banks to airlines,” Rastogi said. “It’s better executed in larger-stake situations such as buyouts and is tougher to do in minority deals due to lack of control, but things are changing.”

Some portfolio companies pay for such initiatives but indirectly the cost of the makeover is largely borne by PE investors.

The fee structure varies. Consultants can charge by the hour, a percentage of costs saved or ask for a lump sum.

To be sure, it isn’t easy working with companies with the goal of readying them for a stake exit. Companies can baulk and refuse to implement strategies they see as inimical to their interests. It’s also difficult for PE firms to get portfolio companies to work towards an exit as most transactions in India are minority stake deals.

“We have seen instances when some companies said they could work on these strategies themselves,” said Avinash Gupta, senior director and leader, financial advisory, Deloitte, in India. Gupta said preparing for an exit in some cases starts for them from the day of investment, while in some cases they offer assistance at a later stage.

PE firms, on the other hand, say consultants come in handy in the event of a potential M&A transaction. “PE teams have different skill sets. Sometimes PE shops are small and they may not know where interested strategic buyers are,” said Mukul Gulati, managing director, Zephyr Peacock Management India, a global PE fund, adding that he selectively uses consultants based on their industry expertise.