Private equity firms in India have been increasing their share of controlled buyout transactions, as they juggle high valuations in the market, panelists said at last week’s AVCJ Private Equity Forum 2024 in Hong Kong.

“In our mix of portfolio, there is a clear preference toward controlled,” Amit Jain, Managing Director & Head of Carlyle India Advisors noted, as peers from Kedaara Capital, Ontario Teachers’ Pension Plan (OTPP), and Multiples echoed the view.

The key, however, is synergy with the promoter. “If you’ve got the counter-party wrong, it will not work out for you, whether controlled or otherwise,“ cautioned Deepak Dara, Senior Managing Director and Head of India, Ontario Teachers’ Pension Plan.

Manish Kejriwal, Founder and Managing Partner at Kedaara Capital, pointed to the importance of sector expertise before delving into deals. The opportunity in India is massive, he said, adding that it is important for firms to understand what not to do and what to pursue.

“We don’t touch infrastructure, real estate, or credit. And even within private equity, there are certain sectors we won’t get into and certain sectors we love – financial services, consumer, healthcare, tech and tech services,” Kejriwal said.

Sudhir Variyar, Managing Director & Deputy CEO, Multiples Alternate Asset Management said: “With fund sizes increasing, transaction sizes increasing, our own confidence increasing and the need for capital in portfolio companies increasing, Multiples Alternate sees a gradual trend toward more controlled transactions.”

What gives the funds confidence is a predictable route to generate returns on deployed capital, panelists said. India’s capital markets have been among the most attractive in the world.

This combined with around USD 2bn–USD 3bn of domestic capital flowing into public markets per month via mutual funds, has held the markets steady even in the face of foreign institutional investor (FII) sell-off, media reports noted.

However, a key issue to be addressed remains the valuations commanded by Indian assets, panelists agreed.

Valuations’ game

“India typically will be overvalued because we have an underlying growth story which is superior,” Kejriwal said. In terms of deploying capital, Kedaara has been conservative this year owing to high valuations, he said adding that the firm which on average closes five deals, has closed two this year.

A lot of pan-Asia funds raised in recent years targeted China. However, with investments in China slowing, that supply of sponsor capital has flowed to Japan and India leading to stretched valuations, Kejriwal noted.

Dara noted that Indian investments deliver a 15% -16% ROE compared to Japan’s 10%. The price-to-book in Japan is at around 1.5x as compared with India’s 4x.

While India’s capital control and strengthening domestic market play a role, it cannot be both a buyer’s and sellers’ market, Dara explained.

Carlyle’s approach to temper valuation expectations, Jain said, has been to reach out to promoters of sizeable non-listed businesses that could be ripe for a listing in two-three years.

“We go to such (promoter) families and say please don’t sell us 100%. We like control, let us keep 70, and you keep 30. Here is our game plan and we create a buyer into the seller and therefore it brings the valuations down, at least to a reasonable level.”

Overall, India currently tilts toward being a sellers’ market with the public markets offering attractive returns for secondary share sale, panelists agreed.

“I don’t think anybody else (sponsor peers) is paying 60% of what Indian public markets are paying,” Kejriwal said, highlighting portfolio Vishal Mega Mart, which Kedaara acquired five years ago at 16x-17x EBITDA. The current valuations of Vishal Mega Mart peers – Trent [NSE: TRENT] is 100x EBITDA while that for D’Mart [NSE: DMART] is at 60x EBITDA, he noted.

Multiples’ strategy to exit or pare stakes has been to sell during pre-IPO phase, Variyar said. Multiples is better off taking the liquidity, as it gives far more certainty from an LP perspective, to demonstrate a strong return.

Once a company goes IPO, other restrictions occur. “People don’t want you to sell in a certain time, there is a signaling effect that is there, there are multiple private equities which own larger chunks and therefore coordinating exits adds a layer of complexities to it.”

Sectoral themes

The thing OTPP likes about India is the opportunity to be a multi-asset class, Dara said. “We look at private equity, infrastructure, late-stage growth, credit. We will add real estate. So, we see tailwinds in India which we don’t see anywhere else.”

Within the sectoral bets that funds are exploring, Carlyle groups its assets into – India for India and India for the world, Jain said.

India for India theme is where the firm bets on those companies catering to domestic consumption, financial services, and healthcare. India for world, are companies in those sectors where India as a country has a competitive advantage – IT services, API, advanced manufacturing, specialty chemicals, packaging, and auto components, he explained.

Jain pointed to Carlyle’s deal signing with two smaller Indian auto component companies, which are primarily an export player with 70% of their business from US, EU and 30% domestic. The idea is to consolidate that platform, invest in technology, and build the front end on business development like is done for IT services.

Manufacturing is the place where, if India gets its act right in getting factories, could attract more private equity dollars, he averred.

An important area to watch for export-oriented businesses is the rupee-dollar movement, panelists noted. Rupee depreciation against dollar would lead to margin expansion, further profiting such businesses, they said.

Liam Coppinger, Senior Managing Director, Head of Private Equity Asia, MANULIFE INVESTMENT MANAGEMENT Speaking after the India: The belle of the ball panel at the AVCJ Private Equity Forum 2024