Until very recently, Indian private equity (PE) firms works in a very different fashion in comparison with the PE firms in the west. Most of the deals in the west are leveraged buyouts of family businesses followed by replacing the existing management of the company with professionals. However, in India, until recently PE deals are mostly financial investors, who buys minority stakes in the companies and infuse money into the mid-sized companies, and does not involve management buyout or control of the management of the company. PE firms would seek for management control only when they found out financial irregularities or mismanagement in the company.
As most of the traditional businesses are family run businesses, the promoters of the companies are not comfortable with going out public or giving away control to outsiders. Most of such businesses, does not like handing over the company for the growth capital, until and unless they are in dire need of such capitals.
Family businesses have their own limitations, after a certain point, it becomes hard for such businesses to scale up, and need to be handled by professionals who can help in scaling up the business. PEs generally bring with them expertise knowledge of operations in the particular sector, which is key for improving the operations of the company. In 2008, PE firm Actis Captial acquired 63 % stakes of Paras Pharmaceuticals, and made several changes in the management of the company, which was instrumental in streamlining the operations of the company. There was an increase in turnover of Paras from less than 300 crores to 400 crores by March 2010. In December 2010, Paras was bought over by Reckitt Benckiser for a sum of Rs 3260 crores, resulting in profit for both Actis and the promoters of the company.
Apart from outright purchasing of the majority stakes of the companies from the promoters or public, the PE firms are taking alternative ways to acquire majority shares. The PE firms would enter into an understanding wherein the firms would lend out loan money through its NBFC arm to the promoter, and in turn the promoters will convert the loan into equity over a period of time.
Major controlling deals in 2013-14
According to Protiviti Consulting, in 2013 there were 450 PE deals worth $10,391 million in India. Out of the 450 PE deals, there were 13 PE deals amounting to a total of $2 billion, which involved purchase of either majority states or the entire stakes of the company. Most of the PE deals are in the IT or ITES sector, mostly owing the young ownership of such companies, who does not have significant emotional connection with the company and ready to part away with the ownership of the company. The PE firms are increasingly recruiting experienced senior executives having a long experience in the operations, to run the acquired companies.
- Baring (Asia) acquired 71.4 % stakes of Hexaware Technologies for $443 million. Out of the 71.4% stakes, 41.8% were acquired from the promoter Atul Nishar and General Atlantic Partners, 9.6 % from Chris Capital and 20% from the open market).
- KKR India acquired Israel based tire manufacturer, Alliance Tire for $470 million, which is one of the highest PE deals in India.
- Apax Partners acquired outsourcing software R&D firm GlobalLogic for $ 420 million
- Partner’s Group acquired technology support firm CSS Corp for $270 million.
- Blackstone Real Estate Partners acquired Unitech Ltd. for $414.78 million
The new trend of taking not only financial control but active participation in the management control by the PEs in India over the last 2 years has been quite significant. However, as most PEs look for exits in an average of 5-6 years, it would be interesting to see how they can turn the companies more profitable and expect a better return on the investment made. In most cases the PE firms found out that they are not capable enough to handle the operations, only after the deal has been made and the existing management is not performing efficiently to deliver the expected returns. Apart from inefficient management, other problems in Indian companies include poor corporate governance, inadequate cash liquidity, which needs to be managed by the PE firms.