Business News/ Companies / People/  ‘Financial sponsors are now ready to turn promoters’

MUMBAI : Financial sponsors are now ready to be promoters. You will see many acquisition deals from PEs. They have done it in the past. They are more comfortable with the talent pool available in India to run businesses, they have given open offers and managed listed businesses, confidence is high and that will continue to be a large bucket of deal activity, S Ramesh, managing director and CEO of Kotak Investment Banking, said in an interview. Kotak has been one of the leading investment banks in terms of M&A and equity capital market activity and is seeing its business grow steadily. Edited excerpts:

Where are you seeing the deal flow coming from?

Today, you have the top 15 corporates. Then, there is this middle layer, who have also been very active in dealmaking. And then, this whole set of financial sponsors has now become quasi-promoters. So, they are in the middle of a lot of investment activity. Acquiring, selling, they are investing. So, they are divesting, and hence there is a whole lot of activity. The composition of clients has evolved and changed.

So, what are you advising them on?

Our ideation over the last few years, if I were to give you what is the day job that we have, is no longer product solutions. It is about solving specific questions of clients or problems of clients. Say a private equity investor has a business that he likes, but he doesn’t like the whole business. We help them spin off this vertical they do not want. In the case of corporates, they are looking at either divesting assets or raising capital. So, I think those themes are well known, and the bigger groups are investing, divesting, or spinning off.

How are these corporates funding their acquisitions?

You cannot have had a better time on the quality of banks than you have today. The banks are squeaky clean. I think this is going to hold you in good stead for the next 8-10 years. They are not as big as the global banks. But I think a string of 10 banks is now available, clean, big; they can do big stuff. These banks are doing a lot of acquisition financing. If you look at fiscal 2022, acquirers raised close to $32 billion to fund acquisitions, which was only $11 billion in FY21. The number is large. Acquisition financing is now evolving into a good product.

The new-age economy companies are another bucket where there is hectic dealmaking. How do you see it?

India needs new-age companies. If I look at new-age from a distance, in the last five to eight years, all of them have been brilliantly coming up to solve some specific gaps or problems. But what happened is everybody got carried away with esoteric valuations. Those valuations were frankly not just on paper, they were also backed by investments. In 2021, I think somewhere we lost the plot. But today, everybody has got a lot more realistic. Those valuations are not sustainable. That’s the new reality. Secondly, what was a growth driver has now got into growth plus profitability. People want to see some Ebitda, profitability, some unit economics before they say, okay, you can go to the markets, or I’ll fund it, I think funding is there, but people have to prove some profitability. Therefore, in my judgment, you will see selective M&As because unless one and two or two and three (number player) consolidate, they can’t go to markets, and they can’t get funding. Otherwise, there will be mortality for both. So, this is the new reality.

But, we don’t see people accepting lower valuations.

No. They are. And one thing I admire about these new founders, they’re very realistic. They are young, they’re not emotional, they’re scientific. I think they will do what they need to do to survive. Some will sell some will consolidate, I think you’ll see action of a different kind. We are getting early inquiries, but not enough for me to tell somebody like you that in this space, or in that space, it will happen.

Do you see sustainable businesses emerging out of the new-age fintech firms?

I think so. I think new-age fintech is an absolute necessity for India. But they have to focus a lot more on profitability and unit economics, the competitive landscape and the craving for growth. They have to cut back a little. I think that’s already happening.

Do you see a revival of the markets after the Mankind Pharma IPO?

I don’t see a thematic revival. But I see a revival slowly building up through successful examples. You know, we did Mankind IPO, in a way that should be a catalyst for revival of primary market. If you ask me, will Mankind revive 20 IPOs? I don’t think so. But looking at the ingredients of Mankind, companies of that kind which are dominant, good, profitable, all of them should feel enthused to go to the market.

But the pipeline to the markets is huge. How many of them will be able to really tap the market?

If you look at the pipeline of IPO filings with the Securities and Exchange Board of India (Sebi), we have close to 1 trillion of total pipeline has been filed. Of this 65% is cleared by Sebi and around 35% are in the pipeline. I don’t think that 1 trillion will happen. So, it can be a much smaller subset but there will be revivals. Two things that I see the market being very specific about, I think the bid-ask between fair value and investors will not change. That’s where I think a lot of it is stuck. You have to be practical. PE investors are also gearing up. We are seeing record inflows. A lot of sponsors are sitting on record dry powder. Some have raised large Asia and India focused funds and many are trying to do platform deals as they are now able to put a team in place. I think that will continue. And sponsors are now ready to be promoters. That comfort factor comes from the number of times they’ve done acquisitions, made open they are generally okay with the ecosystem.

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Updated: 22 May 2023, 11:05 PM IST
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