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Buyout deals, in which PE firms take a controlling stake in the companies they invest in, crossed $2 billion (Rs 12,400 crore) in value terms in 2013. While overall investments in value terms came down sharply by 18.8 per cent last year, the buyout category of investments was the only one to show an uptick in both value and volume terms (18 deals) over the year before. In 2012, buyouts had totalled $1.9 billion across 17 transactions.
According to Venture Intelligence data, buyouts accounted for less than five per cent in volume terms during 2013. However, it accounted for as much as 27 per cent of the value pie.
According to Arun Natarajan, CEO of Venture Intelligence, the major reasons why buyouts are at an all-time high are the rupee-dollar fluctuation, which worked in favour of investors, and attractive valuations. Investors including limited partners believe in taking control in an investee firm, as it can address issues such as corporate governance and offer smooth exits. Avinash Gupta, senior director and leader (financial advisory) at Deloitte in India, pointed out that sometimes just one deal can swing the numbers. Buyouts are gaining momentum for a different set of reasons — earlier investments are getting matured, rupee valuations, challenges in running the business and lack of avenues for exits, he says.
“Buyouts are going to be more, unless other options are available, especially IPO, which is a favourable option,” Gupta noted. He added there would be a lot of interest in sectors where the cost is in rupee but revenue in dollars. For example, sectors such as information technology (IT) and pharmaceuticals.
On the other hand, PEs are also asking promoters to dilute their majority stake together with the PEs, in which case the premium will be high. It doesn’t mean the promoters will exit the company, Gupta said. “They will continue to run the business and they have the option of increasing their stake later.”
Promoters also feel that doing business is becoming difficult due to hassles such as corruption, labour issues and manpower shortage, lower margins, etc. Some companies find that the next-gen is not keen to enter family business.
Promoters of mid-size companies — especially in sectors such as IT services, manufacturing and health care — are seen willing to part with majority stake. Notably, most of the buyouts transactions are between two investors — one PE selling to another. Explaining the focus on mid-size companies, Gupta said most of the Indian funds are in the size of $400-500 million, which they need to invest this money across 10-15 deals. So ideally, the funds would invest $20-30 million per deal, which are generally categorised as mid-size with a turnover of around Rs 600-700 crore. This trend also shows the sector is maturing in India. In developed countries, buyouts contribute a significant portion, while in India, it was minority or negligible, Natarajan of Venture Intelligence said. The sectors that reported most number of the buyouts are IT & IT-enabled services (five deals), manufacturing (five deals), engineering and construction (four deals) and agri-business (one deal), education (one deal), food and beverages (one deal) and health care & life science (one deal).
