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PE funds on a buyout binge

December 09, 2006 13:21 IST

When Nilgiris, the country's oldest supersmarket chain, was looking at growth, Actis, a private equity firm stepped in, bought out a section of the promoter group, which was looking at other business opportunities, and is running the company with professional managers with the aim of consolidating its position in south India. It invested $65 million in the process.

Such instances are still fairly uncommon, but the initial stirrings are visible.

According to Venture Intelligence, a research service focused on private equity (PE) and venture capital activity, the first nine months of 2006 have witnessed eight buyouts by PE investors, compared with six in the entire 2005 and just two in 2004.

"While ICICI Ventures and Actis led the way in 2003 (with their respective buyouts of Tata Infomedia and Punjab Tractors), such deals are now becoming increasingly common attracting both global buyout specialists like KKR and regional players like Navis Capital," said Arun Natarajan, founder & CEO of Venture Intelligence.

At this point, buyout funds in India are striking deals in two ways. One, they are targeting large business houses which want to exit some of their non-core businesses and two, working with companies where some members of the promoter family want to move out.

Growing deregulation and competition is highlighting the need for specialisation, leading to exit from non-core businesses. Deal opportunities this creates have drawn venture buyout specialist firm Garnett & Helfrich from the US to Indian shores.

G&H specialises in spinning out businesses from large global technology companies and growing them as focused, stand alone businesses.

Their recent global investments include Wyse Technology (world leader in thin-client computing), Ingres (open source enterprise database company spun out from Computer Associates) and Blade Network Technologies (a supplier of network infrastructure divested from Nortel Networks).

Said Neeraj Gunsagar, partner, G&H, who is scanning the Indian market for such deals: "These businesses may or may not be profitable or cash flow positive, may be in need of new technology and products to expand existing offerings, and may even be 'broken and orphaned' within the parent organisation."

However, what these businesses must possess for them to be spinned out "is the potential to be turned into great operating companies that can grow revenue and profits dramatically in the coming years as standalone entities."

Specifically in India, G&H is also looking at software services companies which can ably support its global list of investee companies.

H V Harish, partner, corporate advisory services, Grant Thornton, feels that private equity will bring in changes in the way Indian corporates are managed, just as the FII wave earlier brought with it international practices and benchmarking of companies. "The difference is FIIs were external bodies which pushed the change whilst PE will push the change from inside."

A little behind PE buyouts is management buyouts in which existing managements buy out the owners. Even further behind is leveraged buyouts which are dependent on borrowed funds.

This is because debt markets in India have not yet matured up to global standards.

Said Nainesh Jaisingh, head - India, Standard Charted Private Equity: "So far buyouts have been of relatively smaller sizes of $25-50 million in India. The momentum is expected to pick up once the initial deals show evidence of successful partnerships between financial investors and professionals."

There are two hurdles in the way of buyouts taking off. One is of promoter attitude.

"In my dialogues with promoters I sense they feel they are losing control of companies which they have nurtured. But we want to take them along with the growth of the company after we get involved and share results of the uptake. They may not have the required management bandwidth to take the company to its next level, which we have to fuel," Gunsagar highlighted.

The issue is a systemic concern. There is a feeling that PE players promote short-termism. Harish does not deny that there are "risks of private equity becoming a big force is short and medium term valuation maximisation. This is natural given that their own funds are typically medium term."

They may not adopt a short term approach in the investment stage but "they will be pushing management to maximise value towards the exit stages which may result in short termism," cautioned Harish.

Raghuvir Badrinath in Bangalore