M&As drive private equity exits to $24 bn surpassing last year's $14.4 bn

The  capital markets have been volatile over recent months and this has meant fewer Initial Public Offers (IPOs) of equity. Yet, exits by private equity (PE) investors have touched $24 billion (Rs1.7 trillion) this year, surpassing the $14.4 billion (Rs 1 trillion) of exits last year.

What is driving these? Mergers and acquisitions (M&As) or strategic buys, by the likes of Walmart, Teleperformance SA, Arrow Electronics and Ebix, followed by PE-to-PE secondary deals. At $15.35 billion, these accounted for 63 per cent of the deal value in 2018 till mid-November, compared to 23 per cent in 2017. Secondary deals accounted for 19 per cent of the deals in 2018.  

Sanjay Nayar, chief executive officer at KKR India, feels large exits through the capital market are difficult, given the state and depth of the public markets.  ‘‘Strategic M&As and PE purchase continues to be a realistic and sizable way out, given that these investors have a longer term view and India's  macro and micro (factors) look attractive,'' he said. 

Darius Pandole, managing director and CEO for PE and equity AIFs at JM Financial, says the increase in exit activity over the past two years is a big positive for the segment.  ‘‘This is an indication of the industry maturing, and has in large part been driven by an improvement in market conditions and investor sentiment.'' 

Within the overall increase in exit activity, the increases in M&A and strategic sales has been driven by a variety of factors, feels Pandole. One, more maturity among PE investors, who have seen various business cycles and are more open to acquiring or selling controlling stakes in companies. Two, PE investors are willing to explore different exit strategies for returning investor capital.

Three, issues of succession planning as family businesses scale up, with the next generation wanting to do something outside the traditional lines. This also creates opportunities for M&As. Finally, young entrepreneurs who have set up successful businesses with PE or venture capital (VC) funding and are open to exits in a defined timeframe.

Dev Khare, partner at venture capital firm Lightspeed India Partners, believes what will continue to drive exits is large-scaled companies that are market leaders. ‘‘It has been two years since the introduction of Jio, India Stack and GST (the goods and servics tax), and we have seen internet adoption spiral up to 400 million users, driving much faster growth in internet and mobile companies,'' he says.

If one compares PE/VC exit activity in 2017 with what has happened in 2018 (January to October) so far, one finds some trends, says Vivek Soni, partner at consultancy EY India.

For one, open market exits (sale of equity positions in listed companies by PE/VC funds) have declined sharply, to less than a third of values recorded last year, both in terms of value and volume. This is due to volatility in the market, amid global and local headwinds. Open market exits accounted for 80 per cent of PE/VC exit deal value in all of 2017 but has dropped to six per cent in 2018 (year to date) 

Exits via IPOs have fallen a little more than 50 per cent (both value and volume), with many companies deferring their plan as the current equity market climate is not perceived to be conducive. While the number of PE/VC-backed IPOs in the first half were fairly in line with the same period last year, the slowdown has been pronounced in the July-October period. 

Nonetheless, interest from global strategic investors to participate in the Indian market (one of the fastest growing economies in the world) has helped counter the slowdown in traditionally favourable modes of exit. Walmart, Teleperformance SA, Arrow Electronics and Ebix have been some of the large global strategic investors which bought quality assets from PE funds.

More consolidation in some sectors has also contributed to the rise in PE/VC exists via strategic deals. Examples are in renewable power (Renew-Ostro), media (Reliance-Saavan), E-commerce/Fintech (Myntra-Witworks, Netmed-JustDoc, Swiggy-Scootsy), as also information technology and in IT-enabled services (Peoplestrong-Grownout). 

With record levels of dry powder, PE funds are keen to take up quality assets from early investors and provide capital for the next level of growth to these companies. For instance, Partners Group and Kedaara Capital bought Vishal Mega Mart from TPG, Apax purchased Healthium Medtech from TPG and CX Partners, General Atlantic purchased Capital Foods from the Invus group and Advent bought Manjushree from Kedaara.

What has changed on the ground for exits or strategic sales to take off? ‘‘The total stock of quality assets with significant PE ownership (minority/majority) has increased materially on account of the heightened PE/VC investments seen since 2015.  The industry has acquired critical mass, which is leading to good exits for investments made more than four years ago,'' says Soni.

PE exits have increased despite the currency fluctuation and current market conditions. Ashraya Rao, partner at Khaitan & Co, says this could be attributed to a variety of factors. Such as relaxation in the regulatory framework and foreign investment norms, PEs being more open to explore alternate modes of exit, availability of new players,  regular value enhancement and maintenance checks by PEs on portfolio companies, capitalised upon at the time of exit, adherence to contracts by Indian counterparts and, of course, the pressure on PE houses to provide return on investment.