Rise in buyout deals is being driven by succession issues, IBC and larger fund sizes
Overall PE investments grew at an annual average pace of 25% to $35.8 billion in 2018
Private equity (PE) funds in India are increasingly preferring to take control of the companies in which they are buying stakes.
In the past five years, control deals grew at an annual average rate of 50% to $9.9 billion in 2018, according to data from EY India. In comparison, overall private equity investments grew at an annual average pace of 25% to $35.8 billion in 2018.
This tremendous growth in buyouts is driven by a significant increase in the size of investments, making PE funds seek more control over the companies they invest in.
“The trend is led by the need for private equity funds to control their destiny and exit, given that the size of their cheques has increased meaningfully. Irrespective of ownership, private equity funds are looking to back management teams that have a partnership mentality," said Aisha De Sequeira, co-country head and head of investment banking, India, at Morgan Stanley.
Globally, PE fund sizes have also become larger and their capacity to invest is much higher than what it used to be 10 years ago, while on the supply side, businesses have matured and so has their need for funds, compared to the past when promoters were able to infuse most of the capital themselves, she said.
The rising appetite for control deals has meant that such deals have grown to account for more than a quarter of all PE deals in India in terms of the total value of deals. The share of control deals in total PE investments rose from nearly 28% in 2018 to 32% in the first quarter of 2019, data shows.
“Earlier when private equity funds acquired minority stakes, they had to rely on the promoter to provide an exit. Increasingly, a lot of private equity funds want to pick up controlling stakes, drive the business and be in a position to chart their own exit," said Darshika Kothari, senior partner, mergers and acquisitions, at law firm, AZB & Partners. “As the markets have matured and also given the stressed asset landscape, the number of control deals is likely to increase," she said.
According to Divya Sehgal, partner at homegrown PE firm True North, in the last three years, the PE firm did more buyout transactions than it did in its 20 years of existence. “Despite our focus on buyouts, such deals were just 5% of total transactions earlier. That trend has completely reversed," he said.
Growth in buyout opportunities is being driven by several tailwinds such as succession issues within promoter families and introduction of regulations such as the Insolvency and Bankruptcy Code (IBC), said industry experts.
“There are generational transitions happening and many families are preferring to monetise their holdings. IBC related pressures are also resulting in promoters divesting attractive businesses to reduce leverage in the broader group. Lastly, growth is becoming more complex and challenging in many sectors due to macroeconomic factors, higher competitive intensity, digital disruption and increasing regulation. Companies today require a more sophisticated toolkit," said Prashant Kumar, director, private equity at investment firm KKR India.
Entrepreneurs are increasingly keen to partner with experienced PE investors as they bring in operating expertise along with capital, said Kumar. Investors expect control deals to continue to grow stronger and become the mainstay of the Indian PE industry.
“Over the medium term, the PE market in India will look like one anywhere else in the developed world, where it’s dominated by buyouts," said Shashank Singh, partner and head of India at Apax Partners. Singh expects control deals to account for 50% of total PE investments in India in 2-3 years.