Family firms a hurdle for global buyout firms in India

Global buyout giants such as Warburg Pincus and the Carlyle Group may have to wait a decade or more for Indian family business cultures to change before they can make big buyout deals, finance industry executives said.

Meanwhile, growth capital funds have seen better opportunities in India finding bargains by taking stakes in new, fast-growing sectors such as education, healthcare, logistics and consumer-driven business, a private equity conference was told on Wednesday.

“Private equity deals in India are mostly growth-led rather than leveraged buyout, as in the West,” said Deepak Parekh, chairman of Housing Development Finance Corp, India’s top mortgage lender.

“The private equity model in India that works is the buy-in model rather than the buy-out structure,” he told the PEI India Forum 2009 in Mumbai.

On Wednesday, 59 per cent of the audience said they felt “pessimistic” about the future of buyout deals in India, Asia’s third-largest economy, due mainly to a lack of deal flows and the challenge of taking control of local firms, a straw poll conducted by the forum’s organiser showed.

Nearly 20 per cent said a lack of management talent was a problem in making buyouts succeed, given the difficulty in installing external talent. “There is no definition of control (in India). You only know when you lose control,” said Bruno Seghin, a partner of Hong Kong-based Navis Capital, which manages over $2bn with a focus on Asian emerging markets including India.

HDFC’s Parekh noted some big Indian family businesses had begun to think of a change in shareholding structure, though the approach for private equity investors to such potential buyout opportunities will be slow.

“When a family business is getting larger and larger, probably in the next decade, I can see a family stake can come down to 50 per cent or below,” said Parekh, adding global expansion and competition may force big Indian family businesses to bring in external managers to help. “Many Indian entrepreneurs are too emotional. They want to have control of their business,” he said.

Saurabh Srivastava, chairman of the Indian Venture Capital Association, urged foreign dealmakers to focus on opportunities to take small-or medium-sized stakes in Indian firms at their growth stage.

 “Buyout is a form of control and buy-in can be also a form of control,” said Sameer Sain, chief executive of India-focused alternative investment firm Future Capital Holdings.

“At the end of the day, you are backing the entrepreneurs and you want to be an influential passenger on this,” he said.