Private equity (PE) exits in India grew by more than 60% in value terms to $15.7 billion in 2017, making it the best year for PE exits, according to Bain and Co.’s India Private Equity Report 2018...
Private equity investment in the real sense is a lifecycle investment. There is an urgency to add value and show growth to investors. There is a lot riding on successful and timely exits, including the ability to raise fresh funds as well as cashing in on efforts of 5 to 7 years spent on nurturing and growing each business. A successful private equity investor has the ability to identify companies with good opportunities, improve their performance, and get a profitable exit through the sale of a company.
Today, apart from basic investment criteria, leading private
equity firms are also expanding and refining their scope to further enhance their return on investment. Some areas that PEs are looking to enhance and drive higher rates of return are as follows:
Industry-specific specialized PE investments
As markets mature and deal sizes increase, we are finding a trend of private equity funds becoming specialized investors. They are no longer plain vanilla equity or debt investors and are stretching themselves with higher degrees of competencies to add value for companies. Hence, you find that many private equity firms are building their investment thesis around one or few industry sectors, an approach that is yielding noticeable results, particularly in the middle market. The internal rate of return for specialized funds has outperformed the IRR for
generalist funds by an average of 10 percent. There are funds focused exclusively on the distribution and logistics industry, real estate, food and beverage, retail, etc. This strategy helps in focusing and attracting investors with the right background. Working with such industry-informed investors gives the PE valuable flexibility that can be instrumental in generating stellar returns. This helps the PEs to differentiate themselves
by virtue of how they present their portfolio company to a prospective buyer. Today’s buyers are more sophisticated and educated than ever in terms of the questions they ask and the information they want to see and not every potential buyer will view a potential asset in the same way. As sellers, private equity firms need to be prepared to tailor their value propositions to directly address each potential buyer’s interests.
Thinking on exit strategies at the point of investment
Today’s leading private equity firms don’t wait until after they’ve acquired a company to think about their eventual exit strategy. The question of a viable exit strategy is part of their diligence process for considering a potential acquisition. The key to a successful exit is having a clear understanding of the opportunity when you actually execute the deal and then having the discipline to put your plans to work almost
immediately after the acquisition. You will find that on most occasions, when a seller is talking to a private equity firm about a potential buying opportunity, they’re already thinking about the exit strategy well before they write the cheque. They’re asking questions like: what can I do with this asset? How can it grow? How can it be made attractive to someone else to buy it? The most successful exits are the result of a well-thought out and constructed value creation programme that starts at the due diligence stage.
Long-term strategy and advantage of network within portfolio companies
Private equity firms are also increasingly using their investments within their portfolio companies and their networks to add value to new investments. For example, an investment in a food and beverage company can be backed by an investment in a facilities management company
whose existing network and contracts can be leveraged by the food and beverage company to gain access to great locations in food courts and corporates being serviced by the Facilities Management Investee company.
Marketing and PR
For private equity firms in the market to sell portfolio assets, the
future looks pretty bright. The lending environment is at a near-peak level and equity markets are trading near all-time highs. With excess
capital sitting on the sidelines and dozens of private equity investments from years awaiting exits, competition for strong-performing companies is
bound to increase
Private equity firms are recognizing the importance of investing in public relations and brand-building communication strategies to ensure that their firms are visible – with the right messaging – to potential target acquisitions, partners, deal advisors, and buyers. It is important for today’s private equity firms to take a more proactive stance in building awareness about their firms at all stages of the investment lifecycle, to attract the right investors, identify the right targets for investment, and build the firms’ brands and credibility in an increasingly competitive marketplace. With the relaxed regulations regarding the solicitation of investors and the ongoing advance of digital marketing, private equity firms have little choice but to adopt a proactive communication and brand-building approach or risk the chance of being lost or overlooked. Most firms are also using outbound channels, such as phone calls, e-marketing, and face-to-face meetings to raise awareness and grow their business. However, the power of inbound marketing channels should not be overlooked. From blog posts to videos to social networks, any tools that make it easier to find a firm online and get a sense of its reputation can create a powerful flow of relevant relationships that can be converted into deals.
Investment in technology
The earlier long-drawn process of excel spreadsheet or cumbersome internal database solutions are being replaced by Business Intelligence Software. PEs are investing in technology and leveraging the information and data they have to take informed decisions. More than just financial
spreadsheets, the evaluation is also around adopting sophisticated technology solutions to manage the entire lifecycle of their portfolios. Customer Relationship Management (CRM) software is also used to help private equity firms manage their network of buyers, advisors, sellers, and agents more effectively. Data mining tools are gaining attention as a means for firms to proactively source deals and identify potential buyers when they are ready to exit. Virtual data rooms are an integral part of any firm’s ability to showcase portfolio companies it is preparing to
To sum up
Private equity (PE) exits in India grew by more than 60% in value terms to $15.7 billion in 2017, making it the best year for PE exits, according to Bain and Co.’s India Private Equity Report 2018. Public markets emerged as the preferred route for exits in 2017, with over 50% coming
from there (including initial public offerings). Big-ticket deals such as Qatar Foundation Endowment’s exit from Bharti Airtel Ltd. in an open-market transaction for $1.48 billion; Tiger Global’s secondary sale of Flipkart for $800 million; and Apax Partners exiting Global Logic for $780 million powered the exit momentum in 2017. For private equity firms in the market to sell portfolio assets, the future looks pretty bright. The lending environment is at a near-peak level and equity markets are trading near alltime highs. With excess capital sitting on the sidelines and
dozens of private equity investments from years awaiting exits, competition for strong-performing companies is bound to increase. Private equity firms have raised the bar on the level of scrutiny and predictability of achieving the exits they need to meet their own investment objectives.
Accordingly, it is wise to expect them to apply that same level of preparation, scrutiny, and seamless execution in presenting their portfolio companies and answering indepth questions from prospective buyers for a successful exit.
Further impetus to PE exits and strong interest in Indian markets was given by the US giant Walmart Inc. buying 77% stake in Flipkart for about USD 16 billion (Rs 1.05 lakh crore); this is the biggest deal in India and will give the retailer access to the Indian e-commerce market. The deal, wherein co-founders and Japan’s Softbank Corp Group are exiting, values Flipkart at USD 20.8 billion. It is the biggest M&A deal in India this year.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.