Why private equity firms in India are increasing their exposure to buyout deals

Mumbai: Private equity investors are increasingly turning to buyouts to hold controlling positions in companies rather than just purchasing minority stakes in them.

At the Mint India Investment Summit in Mumbai on Friday, several private equity firms outlined plans to increase their exposure to buyouts owing to a host of reasons, including a lack of a succession planning and paucity of talent to take a business to its next stage of growth.

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

According to Nithya Easwaran, managing director of Multiples Alternate Asset Management, several family-run Indian companies face an underlying succession issue.

“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 monetization of the ESOPs (employee stock options) even if they are given, only comes with the private equity lineup,” she said, adding that going forward, 35-40% of Multiples’ portfolio would be in buyout opportunities.

Promoter families have also warmed up to the idea of having a private equity firm involved even as the next generation takes over.

“These are the second generation that have gone abroad, studied abroad, and wanted to come back. They understand private equity, want to diversify, and are willing to give a stake and partner with private equity firms to expand,” said Iqbal Khan, partner and national corporate lead, JSA Advocates & Solicitors.

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Global private equity firm KKR India’s Rohan Suri highlighted that the proportion of buyouts in India had increased significantly over the years with investors increasingly convinced about the viability of such transactions.

Typically, private equity investors take control of a company to enable better growth and governance, improve transparency and valuation by leveraging their business expertise.

“We are increasingly focusing a lot of our time on how we digitally transform a lot of our businesses, how we drive sustainability coefficients there,” said Hemant Sharma, partner, EQT Private capital Asia. “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.

Singapore state-owned Temasek has a more agile investment strategy as it is not limited by portfolio allocations to different investment classes, said Vishesh Shrivastav, managing director, investment, Temasek India. The firm is instead driven by considerations such as “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 added.

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A variety of options and cyclical shifts

Investors in Indian businesses have a variety of exit strategies available today. Beyond exits through capital markets and buyouts, investors are exploring a range of options such as secondary transactions, which include continuation vehicles, and bulk deals.

“Capital markets have become a very viable alternative for making large exits. Ten-fifteen years ago, when foreigners were selling, 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 India.

JM Financial’s MD and CEO of investment banking, Sonia Dasgupta, said the growing interest of PE investors in buyouts was a blessing for the sellers.

“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 maximize the value for your client,” she said.

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The diversification of exit options, however, comes amid India’s public markets turning volatile as a result of multiple macroeconomic challenges.

Acknowledging this, Warburg Pincus’ managing director and head of Asia private equity, Vishal Mahadevia, said: “You have to look at sponsor-to-sponsor exits, find a strategic buyer, if it’s a controlled position. If it’s a minority position… you have to be more creative and find other ways to basically monetize it.”

However, he argued that these shifts are cyclical, with public and private exit routes alternating in prominence over time. “We’ve seen cycles when you have more public market exits, and you have cycles when you have more private market exits, and you’re probably going into a little bit of that cycle this year.”

Mahadevia also alluded to the broader shift towards growth buyouts within private equity. “We are actually taking control positions, buyout positions in these companies. It’s providing a scale and it’s providing us the opportunity to then really drive business more than we would as a minority growth investor. We’re doing both as private equity players.”

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