The Indian private equity (PE) market is vibrant and growing rapidly, while driving value creation across several sectors and business models. India had traditionally seen PE investments focused largely on minority stakes. In recent years, the PE landscape is witnessing a notable increase in control deals where PE firms acquire a majority or full ownership stake in a company and collaborate with the founders/promoters and/or existing/new management to build the business.
Control deals were traditionally more common in Western markets. The trend is now visibly changing in India as well with most homegrown PE firms and global firms present in India increasingly leveraging control deals to drive value creation. The value of private equity and venture capital investments in India stood at $61.6 billion in 2022, suggests India Private Equity Report 2023 with control deals likely gaining more share.
Through control deals, PE firms gain the flexibility to make key decisions that can spur progress, such as pursuing acquisitions, expanding into new markets or introducing innovative products and services.
Multiple avenues to create value
As a passive investor, a PE firm’s avenues to drive value creation are constrained whereas control deals bring in direct responsibility for performance outcomes leveraging multiple approaches to improve performance such as optimising processes, reducing costs, boosting productivity and augmenting management teams.
Control deals also enable PE firms to selectively implement aggressive initiatives, such as divesting non-core assets, merging with or acquiring other businesses, streamlining operations to increase overall effectiveness of the business. Finally, PE firms can bring to bear global and local best practices and insights from other such successful investments.
PE firms should, however, be wary of merely foisting processes without building up a culture of ownership and accountability as that can be counterproductive to growth aspirations.
Strengthening management talent
In India, promoter-built businesses in the small/mid-cap size have traditionally not separated management-ownership. This historic constraint has sometimes led to severe challenges of attracting good-quality managers to what are otherwise inherently good-quality businesses.
In a control situation with a PE firm as a majority owner, the separation of management from ownership enables easier hiring (though only in select geographies) of top-quality talent and clear incentivisation of that talent so that there is alignment of the new management with the shareholder’s goals.
Exploring M&As
Mergers and acquisitions (M&A) play a pivotal role in accelerating value creation once the acquired business stabilises, which is by no means easy. By strategically integrating complementary businesses, firms can drive synergies, scale operations, and expand market reach.
M&As played a prominent role in deal value in 2022, suggests PwC’s Deals in India Annual review 2022 report, reaching an all-time high of $107 billion, nearly doubling the figures of the previous year. PE firms have and continue to play a key role in driving M&A in their portfolio companies.
Risks in control deals
PE firms must, however, be very sensitive about the transfer of control in buyout deals since it is a complex process, involving multiple stakeholders. The complexity can’t be underestimated, especially in India where informal drivers of business value such as relationships with distributors and suppliers, deep understanding of the environment, ability to navigate tough challenges, etc. play a significant role.
These drivers of business success are often managed exclusively by promoters and underscore the importance of aligning with the family or existing management when pursuing control deals. It is crucial to consider the varying levels of control and their implications on the approach, as different private equity firms consider distinct models.
Driving transformation
Private equity control deals have an opportunity to have a transformative impact on organisations, enhancing value creation if executed and managed well. Homegrown private equity firms have proven instrumental in driving sustainable growth, professionalising organisations and capitalising on M&A opportunities.
By understanding these dynamics, stakeholders can gain valuable insights into the potential of partnering with private equity firms in unlocking potential and creating value in today's business landscape.
Control deals have gained prominence in India's private equity landscape, enabling PE firms to take "good businesses" and make them even better. By leveraging their expertise, resources and strategic approach, private equity firms drive value creation through upgrading systems, strengthening management teams, exploring new markets, and embracing M&A opportunities. These control deals not only fuel growth but also professionalise organisations, creating sustainable value for all stakeholders involved. This market will continue to grow rapidly and partnerships between promoters/founders and private equity firms will lead to significant value creation for all stakeholders.
Sunish Sharma is Founder and Managing Partner at private equity firm Kedaara Capital. Views are personal.
