Pvt equity revs up buyout tempo

The domestic private equity (PE) segment, which has attracted investment worth billions of dollars in the last 12-18 months, is set to witness a host of buyout deals in the coming months where controlling interest in local businesses will change hands.

Till now, most of the private equity deals involved sales of minority stakes in companies to private equity funds.

However, the trend is set to change as cutthroat competition in almost all sectors is forcing managements of small and medium companies to exit their stakes to PE funds. PE funds bring in professional management to run the company and offload stakes later at a much higher value.

PE funds Actis, Standard Chartered Private Equity (SCPE) and Warburg Pincus, which are specialised in acquisition transactions, have started executing such deals in the country.

Recently, Actis bought controlling stake in south-based supermarket and dairy products firm Nilgiris Dairy for Rs 300 crore, making this perhaps the first major buyout deal.

Barings PE fund's investment in MphasiS BFL also happened to be an acquisition deal. Barings took the stake in the BPO as a pure private equity investment after it had sold off the stake to EDS.

"The competitive pressures following the opening up of several sectors will force managements to make way to professional management teams, which are backed by financial investors," said Nainesh Jaisingh, head of private equity (India) at Standard Chartered, which has made PE investments in six companies in the country worth $175 million till now.

Buyout deals typically involve MBO (existing management buyouts), MBI (new management buyings) and LBO (leverage buyouts). Some of the recent global acquisitions by domestic companies "� Tata Tea's acquisition of Energy Brands, Dr Reddy's takeover of Betapharm, Suzlon's acquisition of Hansen Transmissions, to name just three "� were done through buying out PE fund's stake in these companies.

According to Venture Intelligence, a PE tracking outfit, at approximately $3.5 billion, total investments by private equity investors during the first six months of 2006 already surpassed the investments made during the entire 12 months of 2005, which were $2.2 billion.

SCPE, which previously struck acquisition deals in Singapore ($450 million acquisition finance Nat Steel in 2005) and Malaysia (SCPE was the leading investor in the management buyout of Unza Holdings), is likely to announce at least one buyout transaction in the country soon.

Anil Khatod, managing director of Argonaut Private Equity, which has committed $65 million in PE deals in India, said the three fundamental requirements for acquisition deals "� opportunity to unlock significant unrealised value in the entity, availability of financing and maturity of financial markets and an open regulatory environment "� were beginning to take shape in the country.

"Valuations in India are rich at this time, but there is also a lot of potential for growth and creating significant value. There is plenty of liquidity in private equity market, and financial markets are maturing along with the opening of regulations. These factors make India a good emerging environment for buyout deals," he said.

Argonaut, Khatod said, was looking at deals in several distinct sectors including manufacturing, infrastructure, technology and services in coming months. "Real estate is the only sector we have stayed away from so far," he said.