Arpwood to challenge buyout myth

When Suzlon Group sold German subsidiary Senvion SE to Centrebdige Partners and Arpwood Partners early this year for Rs 7,000 crore, it was the largest buy-out of an Indian company done by a private equity (PE) firm. It is said Indian promoters do not sell businesses and historically, PEs' share in this has been abysmally low.

This is exactly what veteran investment banker Rajeev Gupta, who has teamed with former colleague Amol Jain, wants to prove wrong. "It is a myth that India is not a buy-out market since M&A (merger and acquisition) data suggest a vibrant change of control opportunity," says Gupta, co-founder, Arpwood Partners. "PE's share in M&A is low because of the investment strategy pursued by funds and not because founders do not sell businesses."

Gupta is one of the most experienced investment bankers on the Street, having spent about three decades in deal making. He headed the investment banking division of Hemendra Kothari-led DSP Financial Consultants, which later partnered with Merrill Lynch. After his long stint with DSP Merrill Lynch (DSP ML), Gupta moved to head global PE giant The Carlyle Group's India business. He has now partnered with his former colleague from DSP ML, Amol Jain. Jain had joined another global PE giant TPG Capital as managing director in India after his long stint with DSP ML.

Arpwood Partners will now invest only in classic mid-market leveraged buy-outs as it sees a big opportunity there. "It represents a large under-served segment since global funds do not operate aggressively in this segment because of scale considerations," says Jain, explaining that the large global buy-out funds have a $100 million threshold and domestic general partners have historically focused on minority deals.

Arpwood Partners has not raised any fund so far and it is investing with what is prevalent in the western markets - 'managed money'. This is nothing but money from institutions and people who have given them commitment based on the deal they bring to them. Arpwood co-invested about Rs 700 crore in the Senvion deal, rest was funded by equity from Centrebridge and a portion of debt.

Gupta and Jain wish to do a couple of such deals before hitting the Street to raise a formal fund for investment. "We see a robust deal pipeline driven by issues like succession and need for portfolio rationalisation. High quality management teams are keen to partner PE owners like us to deliver strategic and operating change while leverage markets are also evolving," says Jain.

Apart from identifying the niche market segment, Gupta and Jain have also got their investment thesis in place. "Leverage and the ability to bring operating change is an integral element of our investment thesis," says Jain, adding that it is difficult to earn 25 per cent returns over five years in an unlevered passive investment. According to him, this is a documented fact based on the experience of global buy-out funds.

Gupta and Jain might be once again able to prove themselves right on the Street. Their former boss and veteran banker Hemendra Kothari says, "Rajeev has always been a challenger. He is also a brilliant banker and a very capable team manager with clear thought process and out-of-the-box ideas. He has clear legacy of successful deals, which will help him when he goes out to raise a formal fund."