Tuesday, March 5, 2024
Tuesday, March 5, 2024
HomeBusinessHow private equity firms are moving from investors to management companies

How private equity firms are moving from investors to management companies

In 2016, when HP split in two and was looking to sell its stake in Mphasis, it was Blackstone that acquired the stake. Stock Photo | Photo credit: AP

Janaki Krishnan

Fast question. What do Manipal Hospitals, Mphasis, HDFC Credila, Suven Pharma, Eureka Forbes, Sona Comstar and Coforge have in common? The most attentive corporate observers would have noticed: these are all Indian companies in which financial backers, such as private equity firms, have or had a majority stake, and in many cases took on the role of promoters and run the companies.

The trend of private equity firms and financial investors acquiring management control, controlling interest and governance of companies has been gaining ground over the years and will intensify as traditional family businesses in India find themselves without successors or needing growth capital to run their organization. to the next level. Or, in some cases, the younger generation is not interested in the family business.

In purchase and sale operations in which promoters look for potential buyers, financial sponsors increasingly compete with strategic actors to participate in the sale process and gain control of the asset. In the aforementioned area, financial sponsors have shown greater interest and are willing to take control. The numbers tell the story. In the last five years, investments by financial sponsors in Indian companies have doubled annually compared to the previous five years. Between 2019 and 2023, average annual investments by financial backers were $42 billion compared to $20 billion annually in the five-year block from 2014 to 2018.

Total acquisitions in which financial institutions took control amounted to $55 billion in transaction value in the period from 2019 to 2023, double the value seen in the previous 15 years. Total acquisitions in the period 2014-2018 amounted to 18 billion dollars and during the period 2009-2013 only 5 billion dollars. “The trend of financial investors becoming promoters of listed and other companies has become much more evident,” said Sourav Mallik, managing director and joint chief executive officer, Kotak Investment Banking. He noted that domestic and foreign private equity firms are increasingly comfortable operating in India, managing and controlling companies, as well as subjecting themselves to the rules and regulations that govern listed companies.

Majority ownership

The reasons why existing promoters sell majority stake in their companies and sometimes give up control are varied and innumerable.

For example, in 2016, when printer and PC maker Hewlett Packard, split into two companies and struggling to survive, was looking to sell its stake in Indian software company Mphasis, several global technology companies had shown interest in it, but it was Blackstone . who went in and picked up the stake. He then became a promoter in 2021, when he injected $2.8 billion to further consolidate his stake as he saw long-term value in the company. Mphasis shares, which were trading in the range of ₹404-622 in 2016, are currently trading close to ₹2,600, vindicating the PE’s investment thesis.

Dr. Ranjan Pai of Manipal Health Enterprises was willing to give up a majority stake to Temasek Holdings because he needed the growth capital to run the company and continue providing quality healthcare. In 2021, Shapoorji Pallonji Group sold Eureka Forbes to US buyout firm Advent International as part of a deleveraging exercise and focused on its core areas.

From the financial backer’s perspective, it is about opportunistically using the funds they have raised and generating returns. “They are not really replacing developers, so to speak, but they are taking advantage of the opportunity when individual developers are looking to divest or grow,” Mr. Mallik said.

Financial sponsors have a commitment to their shareholders and investors and their main objective is to provide value. That is a powerful reason for them to run the businesses they have acquired efficiently and profitably.

As industries have matured and private equity firms are investing in more companies, their domain expertise and knowledge has also increased. “They have a professional quality management group,” said Prateek Jhawar, MD, Investment Banking at Avendus Capital. “Perceptibly, they bring more efficiency to operations, because they have better governance structures, are more aligned with the operations and profitability of the company and probably offer the right incentives for employees.”

They can also attract high-quality talent to run companies. After Advent acquired a majority stake in Suven Pharma, it installed new management with industry stalwarts such as Annaswamy Vaidheesh, V. Prasada Raju and Sudhir Singh, all with years of experience in leadership positions in pharmaceutical companies.

Another important point is that, unlike the promoter families, who have nurtured the company since its inception as an idea and with certain ideals, their judgment is not clouded by emotions. Profit and value creation as primary objectives allow financial sponsors to sometimes be ruthless in their decisions.

However, the other side of the coin is that continuity, a sense of belonging and being part of a grand vision are things that a promoter-driven company would have. Jhawar points out that in difficult times promoters would have a backstop and could make risky decisions that may not be profitable immediately, but would be beneficial for all stakeholders in the long run. Family commitment to the spirit and culture of the organization and service to society are elements that financial sponsors could not generate. However, the fact is that financial sponsors, who have acquired controlling stakes in companies, have been able to make profitable exits – whether through block deals, IPOs or through strategic sales – in the process of creating value for shareholders.

For example, KKR exited Max Healthcare in 2022 with 5x returns over a five-year period, having bought a 49.7% stake in the company at Rs 80 per share and sold it at Rs 353 per share.

(The writer is with The Hindu businessline)

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