India will see more private equity buyouts in the future as more and more entrepreneurs and family business houses will be open to sell their businesses or relinquishing control, the panelists at a buyout panel at VCCircle Dealmakers' Conclave felt.
Right now only a 4% to 5% of the total PE deals are control transactions. According to VCCEdge, over 100 PE deals worth $5 billion in India have been control transactions compared to a total number of 2300 PE deals worth $51 billion..
PE buyout shops will, however, have to compete with strategic buyers as entrepreneurs and companies will weigh both options before taking the final call on the buyer. Buyout firms will have to compete with a strategic investor who may offer a greater premium, some panelists felt.
According to Ashwani Khare, Director, Corporate Finance, KPMG, Private Equity firms cannot match up the greater premium offered by other strategic investors during buyouts. Of all total buyouts the total PE buyouts were less than 5%, he said.
But Carlton Pereira, MD of Tano Capital, said, India, as a growing economy, will evolve a new model for buyouts, he said. Sandeep Naik, Co-Head of Apax Partners, echoed the same optimism, while pointing out that the buyouts by the PEs are rising, he said that regulations will ease in the near future to allow more PEs to get in to buyout deals.
Fears About PE buyouts
Other than competing with a strategic investor who always pays a premium, there are so many other fears among the entrepreneurs before they reach into a buyout agreement with a PE firm such as whether the PE firm will cut jobs, focus more on cost cutting and profit, and whether the employees will be taken care of and so on, Khare pointed out.
Krishnava Dutt, Managing Partner of law firm Argus Partners, stressed on the emotional bonding of the Indian businessmen to their businesses, unlike their global counterparts, while seconding Khare.
For him, there are so many out-dated laws which creates a lot of issues in M&As and buyouts, like acquisition finance act which is over 50 years old.
When PEs can go for a buyout
Many corporates are hiving off their businesses. But when to approach a corporate to buy its non-core business is important. There is no point in approaching a corporate, when a particular business of it is performing better, said Naik of Apax Partners.
When the asset of a company is not growing up to the market expectations, then a PE can approach them so that the valuations will be reasonable, he said.
Pereira of Tano Capital explained some of his experiences in raising funds for buyouts using options like SPV way to raise funds and balance sheet debt.