Rewind 2018: Private equity firms bet on control deals, high-value exits

It was a year of discernible  new trends for the private equity (PE) business. Buying a majority interest with management control became the new flavour of the season for PE players. And for the first time, the value of exits came close to matching the value of fresh investments, instilling confidence among global PE players that Indian assets can generate attractive returns on their investments.


It was also the year when the great Indian sale of stressed assets brought new opportunities for PE players to battle it out with strategic investors to grab more than a dozen odd large companies which were on the block.


However, the total value of PE investments this year, according to data from News Corp VCC Edge, remained more or less at the same levels as last year, going down slightly to $28.66 billion compared to $29 billion in 2017.


But that should be seen in the context of last year being a milestone for the PE business: the fresh investments which flowed in were the highest ever in the past 10 years. In 2016, the total investment from PE funds was only $16.4 billion. And more importantly, while the number of deals fell, the size of the average deal was much bigger (see chart).


This was partly because control deals this year were increasingly attracting a lot of PE funds. The reason, according to PE players, is that Indian entrepreneurs facing the challenge of banking loans drying up, and the possibility of becoming a stressed asset, were much more willing to give up management control and remain just a shareholder. Also the Insolvency and Bankruptcy Code (IBC) threw open new opportunities for the acquisition of majority control with many stressed assets on the block.


In 2017, according to data from VCC Edge, the total value of control deals went up by 23 per cent from $4.8 billion in 2017 to $5.9 billion this year, even though the number of deals shrank.


To give another perspective based on data from leading private equity players, last year PE funds in five control deals (of over $100 million) invested $710 million. However, in 2018 global investment firm KKR on its own forked out over $1.2 billion to acquire majority stakes in Analjit Singh’s health care assets (in Max India) as well a 60 per cent control in Chennai-based Ramky Enviro Engineers.


And they were not the only ones. AION Partners, which tied up with JSW, grabbed 74.3 per cent in stressed asset Monett Ispat for Rs 24 billion while Advent International bought a majority stake in PET manufacturer Manjushree Technopak.


Fund managers say the year also saw, for the first time, the value of PE exits (at $25.4 billion) come pretty close to the value of fresh deals. The reason was  partly because of the mega acquisition of Flipkart by Walmart ($16 billion) which also saw the exit of many global funds. This new reality has not been missed by global fund managers. “With the value of exits nearly matching the value of fresh investments this year, it is a trend which both LPs and GPs are seeing carefully,” said Amit Chandra, managing director, Bain Capital.


Chandra said it means that India investments are finally beginning to deliver fair returns on their investments and, importantly, cash is being recycled back through bigger funds for India. “This is a very positive development that will attract more liquidity to the country over the long term” adds Chandra.


The confidence about India is clearly reflected amongst the top 7-8 global PE funds that constitute 80 per cent of the funds. Many of them are raising new funds focused on Asia but this time with a corpus 30-50 cent bigger than the previous funds.


PE fund managers say as these funds are used to allocate money for India, it is a clear indication that more money is going to flow into the country and there is every possibility that the percentage share allocation could also go up. For instance, Bain Capital has just announced it is raising a new fund focused on Asia of $4.5 billion compared to its previous tranche of $3 billion. Or take Blackstone which has announced that it is raising two Asian funds of $9.4 billion.


Notwithstanding these developments, some headwinds will probably need to be tackled. The volatility of the rupee which came after three years of stability has been a big dampener. PE funds point out that the rupee fell by 12 per cent but recovered by around 5 per cent, so effectively, funds which invested during that period saw it depreciate by 7 per cent. That worries investors.


Also the lack of depth in the stock market, especially with the lackustre performance of IPOs, could pose serious challenges for PE funds to find a viable and fair exit route. “The formalization of the economy was a positive development, helping the flow of foreign capital from asset managers like us. But the focus of policy has to be in promoting the flow of local savings into the real markets - real estate, equity and the bond markets. More local savings will not only deepen the markets but also reduce the volatility of the currency. The recent move of the rupee does not help the sentiment per se,” said Sanjay Nayar, CEO, KKR India.


Also, though PE players did participate in the great stressed assets sales, they lost out to strategic players who were ready to bid higher. Except for AION, many of the big boys like Bain Capital, Blackstone, TPG and KKR either withdrew before putting in an expression of interest or lost their bid in the final rounds.


“PEs wanted to be cautious. Besides, the long litigation process, the numerous flip flops by government on the rules and the failure of the company to win the bid despite being the highest bidder (due to court intervention), has stumped a lot of PE players. Also the possibility of a bidder being prosecuted is spooking many players,” said a top executive of a foreign PE fund.


Yet most of them say that they will be more aggressive in the next round of bidding for mid-sized companies as the Insolvency and Bankruptcy Code process now seems to be stabilizing. The message is clear for PE players: India is turning out to be a mature market offering fair returns to investors. With its growth story intact, and despite political uncertainties next year, global fund managers will increasingly bet bigger in the country.

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