Photo: Mint
Photo: Mint

PEs’ new mantra: Control the exit

Buyouts have gained momentum over the last six months, but the move towards such deals has been underway since last year

During a recent conversation with the founder of a mid-sized private equity shop in Mumbai, the topic turned to the spate of buyouts in the market in recent months.

His buyouts strategy is simple. He isn’t interested in buying companies so that he can roll up his sleeves and run them. “Control means to control the exit," he said.

That, in a nutshell, explains the rush lately among private equity firms, particularly mid-sized home-grown ones, to chase buyout deals.

Exits, when private equity firms sell stakes in portfolio companies and return profits to their investors or limited partners, continue to be inconsistent. The momentum from the last calendar year, when the total value of exit transactions touched $9.3 billion, hasn’t continued into the current year.

Mint reported this week, citing data compiled by Venture Intelligence, that investors reported 84 exit deals worth $3.79 billion in the first six months of 2016, down 39.5% and 35.8% in volume and value terms from the first six months of the last calendar year.

For the most part, private equity investors in India have stuck to picking up minority stakes in companies, both unlisted and listed. Their preferred hunting grounds for deals have been mid-sized companies across sectors such as manufacturing, information technology services, financial services and energy.

Unlike in mature private equity markets such as the US or Europe, they haven’t been able to make significant inroads into the country’s large industrial houses or even significantly large businesses, where returns may have been more consistent due to the stability of those businesses.

Instead, private equity finds itself saddled with a universe of companies that typically aren’t run by professional management teams, are weak on corporate governance and lack the financial resources to make the transition to the next level. However, it is those very shortcomings that present private equity investors with an attractive opportunity to get involved. Except that most private equity investors have started to come around to the view that in order to derive the supernormal returns they seek from such investments, they must have more control.

In the first six months of this year, both the volume and value of buyouts have surged. Out of the $7.45 billion invested across 300 deals at the close of June, buyouts accounted for $2.44 billion across 14 deals, compared with $1.14 billion across eight deals in the first six months of 2015, according to Venture Intelligence’s data.

Buyouts have gained momentum over the last six months, but the move towards such deals has been underway since last year. In August, Mint reported that more than a handful of mid-sized, home-grown private equity firms, such as Everstone Capital, Multiples Alternate Asset Management and Kedaara Capital, are increasingly looking at growing their buyouts portfolios in search of better and more predictable returns. Even global buyout shops such as Blackstone Group and KKR, which have played largely in minority stakes deals in India, are in the fray. Last year, Blackstone acquired Mumbai-based business process outsourcing company (BPO) Intelenet Global Services for $384 million.

The strategy seems to be working. This week, CX Partners, the New Delhi-based private equity firm founded by former Citigroup honcho Ajay Relan, scored a big exit with the sale of Bengaluru-based BPO company Minacs. The firm had teamed up with Singapore-based Capital Square Partners in 2014 to buy Minacs from the Aditya Birla Group for $260 million. NYSE-listed Synnex Corp. is buying the company for $420 million. CX Partners’ managing partner Jayanta Basu told The Economic Times that his firm stands to earn a return of 2.5 times its original investment.

Despite the surge in numbers, however, buyouts remain a small part of the country’s overall private equity activity. In order to become a more mainstream strategy, private equity firms still have to overcome one major obstacle—finding the right management teams to run their buyout ventures. Buyouts by definition imply that private equity investors bring in professional management teams to take the business to the next level. That, according to several fund managers, is far more difficult to source than buyout deals themselves. Just about every fund manager that is looking to do buyouts now spends an equal amount of time building relationships with senior operating managers, who could later potentially be induced to participate in future buyouts. Ultimately, more than the quantum of stake they corner, their ability to convert those relationships will determine how much control private equity investors will have on exit outcomes.

Snigdha Sengupta is a consulting writer with Mint. She contributes stories on venture capital and private equity.

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