In a new trend for the country, promoters are increasingly willing to offer private equity (PE) firms controlling stakes in their companies.
PE firms have long been complaining about not being offered strategic stakes in companies they want to invest in. One has often heard them whining, “We wouldn’t be interested in a small stake” or “deal sizes are small in India because of the smaller stake on offer. Promoters are not willing to give majority control.”
Not anymore. Going by industry observers, PEs are now coming across promoters who are willing to relinquish the driver’s seat in their favour.
Avinash Gupta, national leader - financial advisory practices, Deloitte Touche Tohmastu, says, “We are beginning to see a trend where a lot of people are having a conversation of offering a strategic stake to a PE fund. Promoters want to give a controlling stake to a PE investor.”
“In some cases, the PE investor is already looking at being a strategic investor and divesting in 3-4 years when the company gets listed and getting liquidity or selling off to another strategic buyer,” say Gupta. He also attributes this to people coming to terms with valuations. “They saw the two years when things went bad. Before that things were rosy. Once they are again beginning to see those valuations, they feel they will not be available later.
Shiraz Bugwadia, director, O3 Capital Advisors, confirms the trend.
“Yes there is more willingness from the promoters to offer a higher stake.”
The motivation for such offers often comes from the next generation in a family not willing to be in the same business.
“They (the promoters) are not as interested in remaining in the same business as their parents. The second generation people are selling their businesses like we saw in the case of Ranbaxy, etc,” says Rajiv Sahney, founder and managing partner of
the New Vernon Capital Advisory.
“Another reason may be that the companies are looking at making acquisitions and the amount of capital needed for these is too high,” he says.
“There are another set of owners who have grown the business for the last 15 years but don’t have the expertise to take it to the next level. They are looking for help from a global major or some PE players who have done these businesses in other parts of the world,” says Gupta of Deloitte Touche.
Increasing competition is also a factor. “Markets in many sectors are getting competitive. MNCs are entering directly rather than in JVs and the competition is pushing promoters out of business,” says Bugwadia of O3 Capital.
The motivation to offer a controlling stake is, however, limited to certain sectors. “It depends on which sectors you are referring to,” says Bugwadia.
Companies in emerging sectors that still have some juice left are not willing to offer majority stake. For instance, in pharma and healthcare, it is difficult to find a deal. But if you are looking at bulk drugs, stakes are available. Similarly, in the infrastructure space you will hardly find deals.”
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