Private equity players are upping the ante on buying majority or controlling stakes in companies.

PE-VC investments in buyout stage in India stood at over ₹10,000 crore for the second straight year, data showed.

On Wednesday, Shriram Finance announced the sale of its stake in subsidiary Shriram Housing Finance to Warburg Pincus for ₹3,929 crore. Advent International is reportedly in talks to buy a controlling stake in VIP Industries.

PAG recently signed definitive agreements to acquire a majority stake in Manjushree Technopack for $850-$950 million. TA Associates recently announced taking a majority stake in Vee Healthtek.

Control over ‘exits’

Such deals give funds a greater say in a company’s operational strategy and the ability to ‘control’ their exits at the right time as against waiting for a promoter-driven IPO or a secondary market deal.

“Control over stakes enables the funds to govern, grow and exit from companies in a manner and timeline that suits them. They do not have to worry about “promoters” providing them governance rights or exit at the right time,” said Ravindra Bandhakavi, Senior Partner, Cyril Amarchand Mangaldas.

He added that funds can attract quality talent which may not always be possible in situations where promoters are managing the business.

Bhavin Shah, Private Equity and Deals Leader at PwC India, said PE funds usually acquire an anchor entity and then go for inorganic growth through bolt-on acquisitions to scale up businesses quickly. A lot of work is done post acquisition around revenue growth, cost optimisation, digitisation, governance and capital restructuring to enhance the value of the company to make it exit ready for listing or otherwise, according to Shah.

“A factor which has led to many family-run businesses being up for control deals is lack of interest in the next generation to continue the existing line of business,” said Pallavi Puri, Partner, DMD Advocates.

Value unlocking

Several deals in the past involving PE players picking up majority stake in Indian companies, including listed ones, have generated significant value unlocking.

“Private equity usually works on a 2-per-cent-plus-20-per-cent model, the latter being the “carry”. If the value surface is large, the 20 per cent fees of a very large stake translates into a significant upside, both for limited partners as well as the asset management PE firm. This seems to be a key reason for the larger stakes, especially where the PE firm is confident of getting the right talent to run the acquired entity,” said Ketan Dalal, Managing Partner, Katalyst Advisors.

Carried interest is performance-based and is usually 20 per cent of the funds’ gains on exit.

Hurdles ahead

PE funds may not be comfortable being classified as promoters and the liabilities that come with it. This is changing as the regulatory regime and dispute resolution mechanisms improve.

Indian companies, especially unlisted ones, may be bogged down with corporate governance and operational issues, requiring thorough due diligence on legal, business and commercial aspects as well as forensic study on the promoters, said Puri.

“Buyers typically require representations around the condition and liabilities in the business at the time of exit by sale of shares. Any ongoing liability arising from providing such representations has been a concern for PE funds due to their limited fund life,” said Bandhakavi, adding that funds now turn to warranty insurance to avoid such liabilities.

Acquisitions of listed companies are on the rise but still few, according to PwC’s Shah. This is because valuations are high given current market conditions and our regulations make it very difficult to buy listed companies at a discount. Besides, it is still not that easy to delist a company in India.