Relative newcomers include Bahrain-headquartered Investcorp, which entered India in 2019 and notched its first acquisition in 2021, acquiring SaaS-based e-commerce solutions provider Unilog from Kalaari Capital and 22 individual investors.

Its second buyout came last April, with the 100% carve-out of the cybersecurity unit of the National Stock Exchange of India (NSE) for INR 10bn (USD 115m). The business rebranded as NuSummit in December.

Investcorp hopes buyouts will represent 30% of its investment in India by deal value in the near term, keeping step with the broader market with a view to scale up to 50%-60% by its third vintage. Fund II is in the market with a target of around USD 400m, more than half of which was said to have been raised as of a first close in late 2023.

Even in minority deals, the firm insists on having co-control in the form of ability to hire and fire senior management, as well as drag-along rights to safeguard exit options.

“A lot of the businesses we back are first generation entrepreneurs, who are less averse to selling out control. The creation of a start-up ecosystem has led to that mindset and created a buyout opportunity,” said Gaurav Sharma, Investcorp’s head of India.

“What could be a trigger for more buyouts would be leverage availability, which is currently not there in India. The central bank is very conservative, so I don’t think it’s coming any time soon, but who knows?”

Favourable policy

It’s not easy to coax criticisms about the policy environment from buyout investors in India. The prevailing sentiment is that since the sweeping liberalisations of the 1990s, foreign investment has unidirectionally opened up and regulators have mostly either relaxed deal-making restrictions or prompted M&A as was the case with a critical bankruptcy code introduced in 2016.

There is also a sense that as government has proven more proactive in communication, the culture has percolated down to regulatory bodies, which are increasingly comfortable with private equity and willing to engage.

Vageesh Gupta, head of India at Partners Group [SWX:PGHN], observed this phenomenon last month, when his firm and Kedaara listed retail chain Vishal Mega Mart [NSE:VMM] in a USD 944m IPO. The two investors held 95% of the business. The partial exit delivered Partners Group, active in India since 2014, its largest ever return in the country.

“SEBI’s [Securities & Exchange Board of India] Q&A process for approving the Vishal IPO was as seamless as one could imagine, incredibly professional, very quick and clear, and they moved at a great pace,” Gupta said.

“It’s not just SEBI – that’s across governmental and regulatory bodies in my view. That consistency of guidance means there’s comfort in a buyout cycle, which might be five to 10 years. You don’t have to worry about changes that fundamentally disrupt the business in that time.”

It’s worth noting that India’s euphoric IPO market in the recent term has done much to fuel the domestic buyout opportunity. While high valuations resulting from benchmarking private assets against public markets has resulted in some deal processes slowing down, the performance of the public markets has justified entry prices for buyers by giving them better visibility on an exit.

This is particularly evident with scaled assets. In June last year, EQT and ChrysCapital acquired a 90% stake in education finance business Credila for about USD 1.1bn from HDFC Group, which was obliged to sell by a regulatory ruling. Less than two years later, the investors are advancing a domestic IPO expected to raise around INR 50bn.

Buyout heartlands

Financial services, along with IT and healthcare, including pharma, will remain key buyout areas. Several investors contacted for this story cited consumer as a rising buyout opportunity, including in new business models that cater to a mass market of 400 million-500 million Indians rather than the 50 million most affluent, which have been historically easiest to target.

Inspiration to break new ground in consumer segments largely stems from CVC Capital Partners’ [AMS:CVC] acquisition of a 100% stake in Gujarat Titans – a franchise in the Indian Premier League (IPL) cricket competition – for about USD 761m in 2021. The business is expected to sell for around USD 1bn as soon as next month.

Most of the enthusiasm in terms of emerging sectoral buyout themes revolves around advanced manufacturing and related export-oriented industrial capacity. Carlyle’s automotive parts platform is at the vanguard here, not least because Jain led investment in a similar operation called Sona Comstar in his previous role at Blackstone [NYSE:BX].

Blackstone invested USD 300m in a minority stake in Sona BLW in 2018, later merging it with Comstar Automotive Technologies and securing full ownership of the combined company for USD 150m. It received more than INR 140bn from a staged exit after listing the company in 2021.

The key challenge for the broader manufacturing space is that many investments will only be viable if government achieves real progress in resolving India’s logistical disadvantages accessing North America.

“Indian auto components manufacturers – particularly in the machining and forged components segment – have shown strong and consistent growth, which makes us believe that there’s adequate infrastructure for them to serve customers across the world,” said Jain, who joined Carlyle in 2021.

“As more infrastructure comes, it will help further bring the cost of operations down, making Indian companies more globally competitive in this segment.”

PAG delved into light industrials this month with the acquisition of consumer and pharma plastic packaging supplier Pravesha Industries for an undisclosed sum. This is part of a packaging platform play, including a pending acquisition of drink bottle maker Manjshree Technopak for a reported enterprise value of nearly USD 1bn.

Lincoln Pan, a partner and co-head of private equity at PAG, believes in the scale synergies that can come with a manufacturing platform but is wary of increasing investor interest in export industrials like auto components and commodity chemicals.

“We will avoid export businesses until there is more visibility on what Trump will do to global supply chains and to see the full impact of tariffs,” Pan said. “I don’t know why you would push in at this point. There’s a very high degree of uncertainty. Businesses with direct US market exposure are very hard to underwrite at this time.”

Foreign exchange challenges around rupee depreciation are not generally regarded as a significant hurdle to an expansion of buyout activity, but other inhibitors – largely related to momentum in public markets – will be part of the equation.

There is, for example, significant expectation that a boom in buyout investment in 2021 will be ripe for exit in the next two years, potentially fuelling a wave of sponsor-to-sponsor transactions. But the high valuations associated with this vintage, which is significantly weighted toward large-cap deals, suggest the exits will mostly take the form of IPOs rather than sales to larger GPs.

Furthermore, robust public markets appear to be diminishing the carve-out opportunity as companies opt to list noncore subsidiaries to maximise monetisation. “Some promoters we’ve done business with were running sale processes to PE but pivoted to selling a minority stake and then listing,” said one GP. “This has certainly been the case with financial services.”

Growing pains

It will also take time for the bulk of middle market investors to build out the necessary operational resources to adopt a more control-oriented mindset, especially as the buyout market begins to encompass less familiar sectors and industries. True North makes the most convincing argument for building out operational capacity in the middle market.

The GP, then known as India Value Fund Advisors, hired its first operating partner in 2001 and transacted its first buyout, broadcaster Radio City, in 2005. It has since built out an operations team of four, three of which are full-time partners, and segmented its investment team into specialisations.

“How we approach buyouts has evolved. In 2004, we didn’t have sector teams. The same two partners had to be experts in retail, IT, consumer, pharma. But that doesn’t appeal to promoters – that you do everything,” said Divya Sehgal, a partner and financial services lead at True North.

“Private equity alpha creation through buy-low, sell-high in India is pretty much a story of the past. Now there is no deal available cheap. They’re not ultra-expensive but they’re not cheap any longer. So, the value creation has to come from business building. As portfolios mature, you see the need for an operating team.”

This may be the ultimate limitation on more local managers participating in buyouts, however.

At the top of the heap, ChrysCapital leverages a value enhancement team of about 10 professionals who can be deployed in portfolio companies. Separately, the firm has a roster of advisors and industry veterans it can tap for due diligence on buyouts. Further down the PE food chain, this level of buyout capability isn’t coming online anytime soon.

“If you are doing large buyouts where you think people with this type of experience can add value, then yes, you should build out that team, but not everybody is doing more buyouts,” said Gaurav Ahuja, a partner at ChrysCapital. “It’s a call GPs have to make. How much of this do they want to bring in house and have control over? How much do they want to outsource?”

by Justin Niessner in Perth

[Editor’s note: This article has been amended for the purposes of clarity, and also to note that Investcorp acquired Unilog from Kalaari Capital.]