Buyouts to gain pace as interest grows among private equity investors and promoters, experts say

Mumbai: Buyout transactions by private equity (PE) investors in India have surged in recent years and the market is poised for more such transactions as Indian promoters warm up to the idea and investors see plenty of exit opportunities, experts said at the Mint India Investment Summit.

"If you compare the types of investment opportunities that we have seen a decade ago to now, the proportion of buyouts that we see as opportunities has increased significantly,” said Rohan Suri, managing director, KKR India Advisors Private Limited. Private equity investors who have done buyouts in India are increasingly convinced about the viability of these transactions, he said.

A buyout transaction is one in which an investor acquires a controlling interest in a venture as opposed to a strategic or minority stake sale to infuse capital.

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When PE investors take control of a company, the key purpose is to drive growth and better governance to increase value, said Hemant Sharma, partner, EQT Private capital Asia.

"So we are now increasingly focusing a lot of our time on how we digitally transform a lot of our businesses, how we drive sustainability coefficients there. There is a deep operating team that one has to build and we have been investing ahead of time in building some of those capabilities,” he said.

Promoters seeking buyouts

Promoter families are increasingly looking at buyout transactions to solve problems such as a lack of a succession line or paucity of the right talent to take the business to the next growth stage, said Nithya Easwaran, managing director at Multiples Alternate Asset Management.

“It is just becoming very difficult to get top-tier talent to come into a promoter-owned company, because the ability to have that great ambition, to see the monetisation of the Esops even if they are given, only comes with the private equity lineup,” she said, adding that going forward, 35-40% of Multiples’ portfolio will be in buyout opportunities.

Speaking about succession issues, she said there was “an underlying succession issue, and families want to thereby leave the business in hands where it can grow".

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Promoter families are also warming up to the idea of PE investments as a new generation takes over, according to Iqbal Khan, partner & national corporate lead, JSA Advocates & Solicitors.

"The second generations went abroad, studied abroad, and wanted to come back. They understood private equity, wanted to diversify and they were willing to give a stake and partner with those private equity to expand,” he said. These promoters also tend to forge and maintain good relationships with PE investors and leverage these when they set up their next venture, he added.

The PE advantage

Promoters are also incentivised to choose PE investors over their competition when trying to sell out, said Sonia Dasgupta, managing director and CEO, investment banking, JM Financial Ltd.

“They are a little sensitive to sharing their information to a competitor. But they are much more open to sharing that information with the financial sponsor. So they are also very much incentivised to have a financial sponsor become their new owner,” she said.

Speaking about the advantage that a balance-sheet investor like Temasek has over PE investors backed by limited partners, Vishesh Shrivastav, managing director, investment, Temasek India, said their investment strategy is more agile as they are not limited by portfolio allocations to various investment classes.

Investment decisions are instead driven by consideration of "the specific problem that we are solving for. Are we solving for permanent capital? Are we solving for succession? Are we solving for international expansion?” he said.

Sufficient market depth

Meanwhile, PE investors have taken a shine to buyouts, given the number of exit options available today compared to a decade ago. Given investors' growing interest in India, it has become easier for PE investors to make an exit. Domestic capital markets have also developed sufficient depth to allow for PE exits.

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“Capital markets have become a very viable alternative for making large exits. Ten-fifteen years ago, when foreigners sold, markets would see a sharp correction. That’s not the case now,” KKR’s Suri said. He cited the example of KKR’s investment in Max Healthcare. When the investor sold its position in the hospital chain for ₹9,400 crore in the capital market through bulk deals in 2022, it was the largest PE exit in the country.

The interest of PE investors in buyouts has been a blessing for sellers, Dasgupta of JM Financials said. "It just helps us have a larger number of potential buyers for the same asset. The first rule when you are on the sell side is the more competition, the more you can maximise value for your client,” she said.