KKR India's manufacturing bets pay off

Sanjay Nayar
When Shanghai Fosun Pharmaceutical bought a 86 per cent stake in Hyderabad-based Gland Pharma last month for $1.26 billion, it gave global private equity giant KKR & Co 2.67 times return on its $231-million investment made 30 months ago.

The deal is not unique for KKR, which made two other exits this year from its investment in manufacturing companies. In March, it sold its controlling stake in off-highway tyre maker Alliance Tire Group (ATG) to Japan's Yokohama Rubber for $1.05 billion. This gave a return of 2.8 times for its investment made in April 2013. In January, it sold half its $167-million investment made in Dalmia Cement (Bharat) at 2.4 times return. The investment was made in May 2010.

"In our PE investments for manufacturing and industrial companies, we have tried to back entrepreneurs who want to build scale and global reach for their products. To accomplish this, KKR brought value through its global capabilities along with KKR Capstone's team and resources," says Sanjay Nayar, CEO of KKR India.

The PE firm that set up its India operations nine years ago has so far deployed $2 billion across nine deals. Only exit made outside the manufacturing investments is that from Bharti Infratel through public markets. The investment was made in 2007 and exited fully in June 2015 at return multiple varying between 1 to 1.75 times. Return multiples are estimates provided by PE market intelligence service firm Venture Intelligence as KKR does not share these figures.

The PE firm has a large focus on improving operational performance of an investee company with its partnership with KKR Capstone, in-house operations consulting firm. KKR Capstone team gets involved with private equity team as early as the due diligence process to identify operational value-creation opportunities. Then, it supports boards and management team in developing 100-day value creation plans.

This saw Gland Pharma, which makes the Food and Drug Administration (FDA) approved injectable for the US market, more than double its capacity in the past 30 months. With overarching theme to build scale, KKR also helped it penetrate the US market better.

Similarly, in the case of ATG, KKR helped increase the former's production capacity to 170,000 tonnes from 73,000 tonnes in its three-year period of investment. It also helped it penetrate more deeply in the US and the European markets.

In Dalmia Cement, at the time of investment, the company had 11 million tonnes per annum cement capacity. At the time of KKR's partial exit, the capacity doubled to 25 million tonnes per annum. "We are looking for more investment opportunities in manufacturing and industrial sectors with the same investment thesis - partnering through providing capital and value-add beyond that. We find sectors such as IT, pharma and banking to be good to be in but these are quite expensive now," says Nayar. India's private equity sector has made its most successful returns in technology business.

KKR's success stories in manufacturing stands out because it has been offering capital solutions tailored to a company's needs, while also providing the required value addition. It has extended $3 billion structured financing to business groups across sectors (including manufacturing and industrial companies) in India through credit, non-banking financial companies (NBFC) and capital markets business, which includes $325 million towards real estate-focused financings.

"In the past nine years, we put about $2 billion in PE investments across eight or nine deals and made market returns. Now, we think the time is right to do larger deals to help Indian companies scale and globalise," says Nayar. He also looks to do more of platform deals where KKR can back entrepreneurs with small revenue companies to build large institutions. Last year, it invested in home-grown investment bank Avendus and Emerald Media as platform investments.

Of late, other global PE giants have also increased their interest in manufacturing companies in India. Prem Watsa-promoted Fairfax bought a 30 per cent stake in Chennai-based Sanmar Chemicals for Rs 2,000 crore in April. Sanmar is in the process of doublings its PVC capacity in Egypt to 400,000 tonnes.

"There are a number of manufacturing and industrial sector opportunities available today. Private equity funds are backing businesses that are inherently strong but facing cash flow or leverage related issues. This is classic private equity as is seen in the West and has given PE funds very attractive returns across the world," says Mayank Rastogi, partner, private equity and transaction advisory services, EY.

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