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“Every decade has a different growth story to tell. So, there will be different growth drivers and different sectors that will drive growth. Today, buyouts as a segment has gone up to nearly a third of all private equity investments as against the last decade when they were probably just about 7-8%,” said Neha Grover, regional lead for disruptive technologies and PE funds group at IFC-South Asia.

“So, we will see different pockets of growth. It is a matter of just finding those pockets and gainfully investing in them,” Grover said at a panel discussion on the future of PE funds in India.

Buyouts have been on an uptrend over the past four-five years, growing more than five times in value since 2016, which had recorded $3 billion worth of such deals. Last year, buyout deals accounted for 34% of all PE/VC (venture capital) investments by value in 2019—the highest it has ever been, according to data from EY. In the past two years, buyouts clocked $26.7 billion in deal value, which is more than the value of buyouts in the preceding 12 years combined.

Watch: Mint Investment Summit: Private Equity in India amid slowdown, Coronavirus

The changing investment pattern is partly because of their experience in the Indian market and partly because they want to be in control of their exits.

“I always say that investment is only 25% of our job done, the balance is building the company over the next four-five years and then selling it right,” said Shweta Jalan, managing director of Advent International.

“If an investor behaves like a mutual fund and just sits for the board meetings, then there would be no value addition,” she said. “We believe that the money we invest adds significant value to the company, which is differentiated capital, not the monetary capital, and that is what we try to bring to the table by managing the company.”

The increase in buyout deals is also driven by the change in the mindset of Indian promoters. “Traditionally, there was a belief that debt is cheaper than equity because of which promoters were reluctant to dilute their stakes. But the promoter mindset is now changing,” said Parth Gandhi, senior partner and managing director at AION India Investment Advisors. The introduction of the Insolvency and Bankruptcy Code (IBC), he said, is one of the biggest contributors to that change.

“There is some amount of tempering of debt and the beliefs are changing. Today, the promoter is conscious of the fact that, in principle, if he keeps on taking debt, he may end up losing control of the company,” said Gandhi.

That has led to higher buyouts happening in traditional Indian firms, said Nitish Poddar, partner and national leader-private equity at KPMG in India.

“A private equity fund would be happy to take a minority stake in a company led by a first-generation entrepreneur, but for traditional businesses, there are issues of leveraging and the banks would be involved, and there, it makes more sense to buy a controlling stake.”

But overleveraging the business, according to Sandeep Naik, managing director and head of India and SouthEast Asia at General Atlantic, is more common among traditional businesses than new-age companies.

“Expanding a company or starting adjacent business using debt was common with traditionally run companies with the expectation that the earnings would grow and the debt will be paid back,” Naik said. “The new generation of tech companies are dealing with it much better, and there will be lesser debt-related issues in these companies. The challenge with these companies is that of high valuations.”

“There is about $1.5 trillion worth dry powder with private equity firms right now and almost half of it is trying to chase growth markets. India continues to be a growth market, and with that kind of capital trying to chase growth companies, valuations continue to be high and that is becoming a problem,” he added.

As PE firms become the new promoters of Indian companies, due diligence will become an important cog in the buyout process.

“Going forward, there will be some sort of segregation, where buyout funds with the sort of experience they have will focus more on buying businesses, which they think they can run,” said Nishant Parikh, partner at Trilegal.

“There are a lot of businesses that cannot be run or bought out by private equity firms, and while the boundaries of that keep shifting, the documentation and diligence continue to be more focused and robust,” he added.



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