Decision to build or buy a platform is a function of price but buyouts are helping large investors create a medium and influence outcomes.
Investors in the private equity (PE) space -- from the big Canadian pension funds to home grown funds such as Everstone or IDFC Alternatives -- are opting to buy or build platforms to have more say on the outcome of their investments. And, as buyouts rise, platforms are gaining ground.
A platform is an aggregation of assets, which leads together for an investment theme.
The Canada Pension Plan Investment Board has formed platforms for infrastructure, debt and stressed assets, while PE firms KKR, Everstone, IDFC Alternatives and ICICI Venture have formed platforms for media, restaurants, and power assets.
What’s driving platforms? One is the rise in buyouts and the emergence of large investors, such as pension funds, willing to write big cheques. In PE, there’s growth equity and buyouts.
“Buyouts have not happened in India in the past, but the large platform deals we see today are buyouts,” says M K Sinha, managing partner and chief executive officer, IDFC Alternatives.
For instance, Brookfield’s recent buys of Reliance Communications telecom tower unit and Hiranandani’s office assets or Tata Power buying Welspun’s solar portfolio.
“These are buyouts of platforms… but these buyouts are happening on account of distress and de-leveraging,” says Sinha. All the sellers are deleveraging or caught in a distress.
Toshan Tamhane, senior partner at PwC, says global investment committees don’t want to keep approving small-small transactions once they are clear about the investment theme.
“The challenge is individual deal sizes in India are still very small. Once they have approved an investment theme, the investment committee would rather leave the deals to the teams on the ground,” he says.
Earlier, PE funds were constrained by the deal size or mandates. So, a KKR won’t do deals on the equity side of less than $100 million, its debt team will not do deals of less than a certain value.
“So, all the internal silos start looking at the same thing in five different ways, which can be very messy, especially for a small market like India,” says Tamhane.
The general view is that if you like a theme, go out and build a billion-dollar platform. That might involve some equity, debt, management buyouts, incubation or all of it. Platforms offer flexibility.
For instance, TPG does deals of more than $50 million, less than that and it has to go to the growth fund. “If you are building a platform, all these restrictions go away,” says another expert.
“A fund’s mandate is very narrowly defined. With a platform, you are expanding the mandate in a manner that it meets the overall consideration but also gives you enormous operating flexibility,” says Tamhane. But, how is a platform different from a minority situation or a buyout?
In a minority situation, say John Smith is promoter and a PE firm bought 15 per cent in his company for $15 million, which gives it the right to attend board meetings once a quarter.
“In a platform deal, you are the driver. You are John Smith and you will decide who will be the CEO, CFO, how big you want to be, what would be the strategy.
“It’s a much more involved, proactive strategy,” says Sinha of IDFC Alternatives.
Dhanpal Jhaveri, managing partner-private equity, Everstone says in platforms, “You have to take concept of an owner as well as an operator.”
A buyout is slightly different -- you are inheriting an existing business and then building on top of that, whereas in a platform, you are not inheriting anything. You are creating everything ground up (building out).
A platform company is a holding company for unlisted assets, which the sponsors can list to monetise. Large investors, who invest hundreds of millions in an asset, find it better to control things through a platform company.
A few such examples are the Thames Water Company, where three Canadian pension funds were the sponsors and Japan Solar, which consolidates solar power projects in Japan, had four investors.
Jhaveri cites the example the Tata Group and Tata Industries, and the way the group incubates new businesses. When it wanted to get into telecom business, it created a new entity, Tata Teleservices.
Tata Industries invested, put together a management team, it was given a mandate, capital was provided, strategy was outlined; the team had to go and execute under the governance of the board and the shareholder.
In the early stages of the development, Tata Industries took an active interest in the development of the business. As it developed and listed, it became like any other Tata group company, independently managed and governed organisation.
In the formative years, there’s a lot of oversight, handholding, and support the group offers to make sure that the business comes up and stands on its own feet and run faster than what it would in a standalone company -- in terms of access to capital, approval, or talent.
A new company will not be able to access the best talent. Think of any start-up and what it has to go through in setting up its own business.
“Platforms are similar to a large corporate group getting into a new business, establishing it and giving all the support it requires to grow the business,” says Jhaveri.
Everstone has 200 professionals who work full time with the group and they support the entity to make sure it is running faster. ‘‘In terms of a timeline, what a small start-up would take over 10 years, we want to replicate in three-four years,’’ says Jhaveri.