More conglomerates in India are turning to private equity to divest non-core assets
More conglomerates in India are turning to private equity to divest non-core assets
In what could be India’s largest private equity-backed buyout investment in history, global private equity firms KKR, Bain Capital, Carlyle Group, and Apax Partners are bidding to buy out Hexaware Technologies Limited, an IT and business outsourcing software provider. Currently owned by another private equity giant, Baring Asia, the winning bid is likely to come from Carlyle at $3bn. The firm will be raising $1bn of debt for this acquisition in a leveraged buyout financing deal.
Hexaware Technologies, headquartered in Mumbai, offers automation and cloud services ranging from real-time payment technologies for fintechs to e-learning platforms for the EdTech sector. If completed, the deal will bolster India’s already impressive track record, which saw buyout deals reach a record aggregate value of $19bn in 2020, 2.7x greater than 2019’s total of $7.4bn (Fig. 1).
The largest buyout deals completed in India since the start of 2020 are two growth capital investments in Jio Platforms Limited, India’s leading telecoms provider, a subsidiary of Indian conglomerate Reliance Industries Limited. Vista Equity Partners raised INR 114bn ($1.5bn) for the company and KKR invested $1.5bn, both in May 2020 (Fig. 2).
Jio Platforms has revolutionized the telecoms sector in India with cheap data rates, paving the way for technology firms from Google to Netflix, as well as domestic companies such as online food delivery app Zomato.
In total, Jio Platforms has raised $15bn across 11 deals in just three months, from April to June last year. A large part of this came from selling a 9.9% stake in the company to Facebook for $5.7bn, followed by around $5.3bn in growth capital from private equity firms Visa Equity Partners, KKR, General Atlantic, TPG, L Catterton, and Silver. Jio Platforms also secured investment from Abu Dhabi’s state-owned Mubadala Investment Company, Abu Dhabi Investment Authority, and Saudi Arabia’s sovereign fund.
With these investments, Jio Platforms will continue expanding amid a surge in demand for data in India, propelled by pandemic-driven lockdowns.
Divesting to Restructure and Innovate
Corporate carve-outs will become more commonplace in India over the next few years. India’s private sector is still dominated by conglomerates and their subsidiaries, which have far-reaching functions but unequal performance. McKinsey’s analysis of five conglomerates in India showed that the top three subsidiaries in each conglomerate accounted for at least 70% of the group’s revenue, while the remaining subsidiaries, which could number 100 or more, contributed less than 30%.
Given the macroeconomic headwinds caused by COVID-19, many of these conglomerates are turning to private equity to divest non-core assets. More are turning to carve-outs, as the conglomerates can receive cash for the shares they sell or take the opportunity to divest the business entirely. Private equity firms are well known for their ability to bring in management teams to steer businesses toward growth.
“Private equity can provide capital to ambitious, entrepreneurial conglomerates and partner them,” says Rasesh Vasa, Executive Vice President & Head of Private Equity Banking within the Banking & Financial Institutions Group at Kotak Bank, an Indian banking & financial services company headquartered in Mumbai. “Top-rung Indian conglomerates can follow the example set by the largest one to tap into large pools of private capital,” explains Vasa.
Large conglomerates are acquiring businesses not just to exit profitably, but also to keep up with a fast-changing economy. Vasa foresees more M&A activity as “the new gobbles up the old.” He adds: “The key sectors that will see strong investor interest from India-focused GPs and LPs are technology, consumer, and fintech.”
Indeed, Indian conglomerates are aggressively acquiring smaller start-ups to increase their capability. In May this year, multinational conglomerate Tata Sons acquired a 64% stake in India’s largest online grocer, BigBasket, for over $1bn. Tata Digital, a subsidiary that’s building a super app (an app that integrates many services into a single app), will be leveraging the acquisition to strengthen its e-commerce portfolio.
According to Vasa, three key trends will shape India’s private equity market going forward. “First, the hunt for alpha is stronger than ever,” he says. “This results in the breaking down of distinctions between private equity, venture capital, and buyout deals as well as open-mindedness to new fields such as cryptocurrency and new forms of technology.” Second, crossover funds will enter the traditional terrain of private equity & venture capital. Crossover funds are a type of mutual fund that holds both public and private equity investments. Finally, Vasa believes that deals will become more leveraged given the lower cost of capital.
As India gradually recovers from COVID-19, private equity is well positioned to acquire dislocated assets as conglomerates divest subsidiaries. Carve-out activity is likely to increase despite the challenge of doing due diligence during a pandemic – investors have accumulated large amounts of dry powder, after all.