During 2005-08, foreign investors were flocking to India chasing the emerging market growth story. Many funds (a lot of them first time ones) were able to raise capital in those days, no questions asked. The picture is very different today. There are no stellar exits to show. Most of the PE portfolio companies are lagging in performance and many GPs are left with an aging portfolio.
Even GPs who have capital to deploy are not in a great shape. They need to put to use huge sums of uninvested capital at a time when competition in dealmaking has become so intense. At the same time, they need to avoid overpaying for assets while deal multiples remain high.
These circumstances have forced PE investors to follow a somewhat similar investment style, something akin to their VC counterparts – i.e. buy small and buy more often, come in early into the lifecycle of a company which occupies an attractive niche in a fragmented market, and then carefully add on several other closely related businesses. Such strategies popularly known as “buy and build” have become fashionable in the PE circuit now.
Just last fortnight, private equity firm New Silk Route picked up a significant stake in Bangalore-based Vasudev Adiga’s Fast Food Ltd, which runs a chain of South Indian restaurants. The deal followed the private equity firm’s plans to create a platform in the food & beverages (F&B) sector. New Silk Route is looking to invest $100 million or Rs 500 crore in a portfolio of F&B formats.
Similarly, Everstone capital put in about $20 million in JS Hospitality Services, which operates about 30 Pind Balluchi restaurants, mostly in the National Capital Region, serving north Indian cuisine. The PE firm also invested in restaurant operator Blue Foods.
India Equity Partners, a private equity firm focused on control-oriented investments in Indian companies also recently bought a controlling stake in Swagath – a well known Brand of Restaurant chain in Northern India serving vegetarian cuisine with a speciality in south Indian delicacies and is probably looking at a platform play there.
Besides food & beverages, logistics and finance are spaces chased by PE firms for platform plays. For instance, India Equity Partners has been slowly and steadily building up its logistics platform by acquiring various businesses. It recently acquired domestic road operations of Dutch freight & logistics giant TNT Express in India. It strengthened exposure in the logistics sector adding to its three existing portfolio companies across different segments of the business.
These include Fourcee Infrastructure, a niche liquid logistics rail transportation company, which doubled its business over the previous fiscal year; Swastik Roadlines (Coldex), one of the country’s top cold chain surface transportation companies, and Ocean Sparkle, one of India’s largest private harbour and seaport management services providers.
Why are they doing this? Because, the PE firms want better control of how the companies are run and also a decisive say in the strategy and execution. They are no more willing to bet their fortunes on promoters alone. IEP, for instance, recently appointed Abhik Mitra, the former MD of TNT India, to lead the platform business in logistics.
In another example, Everstone Capital along with Beacon India Private Equity Fund and the private equity arm of Goldman Sachs Group Plc., set up a non-banking finance company Indostar Capital Finance Ltd and got Vimal Bhandari, the CEO of Aegon India, on board to head it up. Here the PE firms are the promoters from the scratch and brings in a management team to run the company who are incentivised with generous stock options and semi-entrepreneurial roles.
There are many advantages of buy and build strategy. It is an effective way to achieve scale in markets like India where scale companies are rare. Buying smaller companies and merging them is often less costly than buying scale businesses. Secondly, it’s less riskier as well as they are familiar with the space.
Funds can also gain a multiplier effect on their portfolio – by integrating several companies into a larger one, they can end up with an asset that is big enough for a public float or to attract the interest of a strategic buyer. Finally, buy-and-build increases the possibility that, by integrating additional assets, GPs could alter the proﬁle of a business languishing in their portfolio and dramatically improve its prospects for a more proﬁtable sale.
In fact, creating a platform or building a portfolio of sector-specific assets is not a novel concept to Indian GPs. ICICI Venture, one of country’s largest private equity fund in terms of assets under management, floated IVEN Medicare, a $250-million special vehicle for investing in the $40-45 billion institutional healthcare delivery segment in the country. The fund invested in more than half a dozen hospitals across the country and also had ambitions of getting listed.
Based on the proven logic that the whole can be worth more than the sum of its parts, such strategies are back into vogue.
According to a latest report in Bain Capital, buy and build bug has struck all global private equity majors too. Some of the high-proﬁle transactions include KKR’s $428 million acquisition of Bond Air Services to complement its platform company Grupo Inaer, a Spanish-based helicopter ﬂeet operator, in the aerospace industry.
In the US, Blackstone Group continued to add to its platform holding in Summit Materials, a building supplies outﬁt. In Asia-Paciﬁc, TPG Capital picked up a $170 million stake in Emir Oil, an oil exploration enterprise based in Kazakhstan, through its platform company MIE Holdings, a Chinese oil and gas company.
Unlike with occasional corporate acquirers, deal making is a core competency of GPs and they seem to be pursuing steps in the right direction for a right ‘buy and build’ strategy- harnessing top talent, honing a repeatable model and planning the exit from the start. However, the jury is still out on if it will prove to be a successful strategy for domestic GPs and yield good returns for them.