Platforms are gaining ground in private equity (PE) — a platform is an aggregation of assets which leads together for an investment theme.
Large investors and Limited Partners (LPs), such as Canadian pension funds, are showing a preference for platform deals, while PE firms are putting together platforms which can provide them with easier exits.
So, TPG has out together a health care platform. Everstone, after setting up a restaurants/food and beverages platform, is looking at the renewable energy (RE) space. Everstone and solar power major Lightsource BP are setting up a £500-million and India-focused environmental energy fund. ReNew Power has roped in Canada Pension Plan Investment Board (CPPIB) to buy Actis’ green energy platform, Ostro.
ReNew didn’t disclose the deal value but said existing investor CPPIB will make an additional investment of $247 million (Rs16.06 billion) in ReNew Power to help finance the acquisition. The new commitment will take CPPIB’s total investment in ReNew to $391 mn; it had injected $144 mn in January this year. ReNew is backed by Goldman Sachs, sovereign wealth fund Abu Dhabi Investment Authority, the Asian Development Bank, Global Environment Fund and Japan’s Jera Co. Philippe Serres, regional director for South Asia at Proparco, says India has the perfect conditions for the setting up of RE platforms. First, the strong push of the government to install some 175 Gw of RE by 2022 is an immense opportunity for investing massively in the industry.
Second, in the current context of decreasing rates, platforms are the perfect tool to reach scale and make business models work. Third, the policy and regulatory frameworks in India have reached maturity, giving investors sufficient comfort to invest in this market.
Mayank Singh, partner at Khaitan & Co, says, ‘‘Platforms enable funds to commit capital, where there might not be significant consolidation or lack of sufficient targets which meet a minimum cheque size.”
This also enables easier exit, either through the traditional Initial Public Offer route or Real Estate Investment Trusts and Infrastructure Investment Trusts in future. Platforms of such a nature permit offerings which are unique and diverse and, therefore, successful, says Singh. The preference for platforms has gained pace over recent years. Investors in the PE space — from the big Canadian pension funds to home-grown funds such as Everstone or IDFC Alternatives — are opting to buy or build platforms to have more say on the outcome of their investments. And, as buyouts rise, platforms are gaining ground.
What is driving platforms? One is the rise in buyouts and the emergence of large investors, such as pension funds, willing to write big cheques. In PE, there is growth equity and buyouts. For instance, Brookfield’s buying of Reliance Communications telecom tower unit and Hiranandani’s office assets or Tata Power buying Welspun’s solar energy portfolio. These were buyouts of platforms, which took place as the sellers were in distress and de-leveraging. Earlier, PE funds were constrained by the deal size or mandates. So, a KKR will not do deals on the equity side of less than $100 million; its debt team will not do deals of less than a specified value. ‘‘So, all the internal silos start looking at the same thing in five different ways, which can be very messy, especially for a small market like India,’’ says the analyst.
The general view is that if you like a theme, go out and build a billion-dollar platform. That might involve some equity, debt, management buyouts, incubation or all of it. Platforms offer flexibility. For instance, TPG does deals of more than $50 million; less than that and it has to go to the growth fund. “If you are building a platform, all these restrictions go away,” says another expert.
“A fund’s mandate is very narrowly defined. With a platform, you are expanding the mandate in a manner that meets the overall consideration but also gives you enormous operating flexibility,’’ says another analyst. Dhanpal Jhaveri, managing partner (PE) at Everstone, in an earlier interview, said in platforms “you have to take the concept of an owner as well as an operator”. A buyout is slightly different — you are inheriting an existing business and then building on top of that. In a platform, you are not inheriting anything. You are creating everything ground-up (‘build-out’).
Take the Tata Group and Tata Industries, and the way the group incubates new businesses. When it wanted to get into the telecom business, it created a new entity, Tata Teleservices. In the formative years, there is a lot of oversight, handholding, and support the group offers, to ensure the business stands on its own feet and runs faster than what it would in a standalone company — in terms of access to capital, approval or talent. In terms of a timeline, what a small start-up would take over 10 years, we want to replicate in three-four years,’’ said Jhaveri
Everstone has been building platforms for a decade, and built out firms ReGen, Indostar and Burger King. The business being created has to fill wide open spaces, where there will be secular growth over the next 15-20 years.
In 2007, the promoters of a company came with a business plan to build an RE business, to make wind energy turbines. Today, it (ReGen) is the largest manufacturer of such turbines in the country. Everstone focuses on bringing professionals who want to turn entrepreneurs and have a meaningful stake in the business.
As consumption trends keep changing, new sectors are coming up. Often, there are no large-scale businesses in those sectors to invest in. ‘‘So, ‘rather than buying something why don’t we create something?’ That’s the philosophy for platform deals,”Jhaveri had said.
With controlling stake, “We will be in control on when we want to exit, synergise across the multiple assets and drive down operating costs,” says an investor.