*People from India, Pakistan, Bangladesh and Sri Lanka are referred to as 'desis' collectively. For more information on the word, please ask one of your friends from the Indian subcontinent
Story Highlights:
-Aggressive LBO financing activity in October: $2.26 billion of LBO debt raised
-Investors' role is to provide growth capital due to nature of businesses
-People's investment horizon is between 6 months to a year, not a pure PE play
LBO Financing Thus Far
There has been aggressive leveraged buyout financing activity over the recent months, with Bank of America Corp. and Goldman Sachs Group Inc. leading lenders in arranging $2.26 billion of leveraged buyout financing in October, the most this year and more than eight times the amount raised in the first quarter as the U.S. exits the worst recession since the Great Depression.
Just to brush up on our understanding of what a leveraged buyout (LBO) is: it is simply a takeover in which the buyer borrows money by usually selling high-yield, high-risk loans and bonds, which are ranked below Baa3 by Moody’s Investors Service and BBB- by S&P. The debt, along with the target’s existing liabilities, is paid back out of the purchased company’s revenue. The buyer typically looks for steady companies, steady cash flow, and is looking to take companies private, buy them out, turn them around, and either exit through a strategic deal or through a listing again.
How Private Equity (PE) Differs in India
Fundamentally, PE in India is very different from PE in the West. In the West and especially in the U.S., it has been more of a leveraged buyout model. In India, given that the economy is in a different trajectory in terms of growth, the majority of private equity deals are growth-related deals, so we don't look at buyouts. We are looking at putting 90%, 80% debt and 20% equity deals to work. These are growth deals, given the nature of the businesses in India, which tend to be more family-run businesses. These are promoter-led businesses. These are not buyout situations. These are situations where you (hopefully) come in as a significant minority investor with appropriate rights on the board seat, etc.; you are basically providing growth capital.
Success of the PE Model
The private equity model in India has actually been fairly successful, which makes me proud as a brown person and having grown up around people calling my country 'Third-World'! People have done well in the last four or five years, and obviously the bull market in India, the equity markets, did help. If you look at the number of funds in India who are investing, it is huge. Five hundred-plus is the number estimated by a Director at Providence Equity, New Delhi. One can infer what has really happened in the last three or four years: there was a lot of hedge fund money. People were looking for a 'quick flip,' which was happening, so naturally people looked at pre-IPO deals. People were investing and looking to exit within a one-year or even a six-month time horizon, so a lot of those deals were happening. They were labeled as private equity deals, which is not a private equity deal in the true sense. That is not how we traditionally look at private equity, where a sponsor comes in and actually works with the management, helping to grow the business.
(Apologies for the abrupt ending. For the next issue, I'll go into further detail about the degree of competition, size of private equity deals in India and the effect of corporate governance)
There has been aggressive leveraged buyout financing activity over the recent months, with Bank of America Corp. and Goldman Sachs Group Inc. leading lenders in arranging $2.26 billion of leveraged buyout financing in October, the most this year and more than eight times the amount raised in the first quarter as the U.S. exits the worst recession since the Great Depression.
Just to brush up on our understanding of what a leveraged buyout (LBO) is: it is simply a takeover in which the buyer borrows money by usually selling high-yield, high-risk loans and bonds, which are ranked below Baa3 by Moody’s Investors Service and BBB- by S&P. The debt, along with the target’s existing liabilities, is paid back out of the purchased company’s revenue. The buyer typically looks for steady companies, steady cash flow, and is looking to take companies private, buy them out, turn them around, and either exit through a strategic deal or through a listing again.
How Private Equity (PE) Differs in India
Fundamentally, PE in India is very different from PE in the West. In the West and especially in the U.S., it has been more of a leveraged buyout model. In India, given that the economy is in a different trajectory in terms of growth, the majority of private equity deals are growth-related deals, so we don't look at buyouts. We are looking at putting 90%, 80% debt and 20% equity deals to work. These are growth deals, given the nature of the businesses in India, which tend to be more family-run businesses. These are promoter-led businesses. These are not buyout situations. These are situations where you (hopefully) come in as a significant minority investor with appropriate rights on the board seat, etc.; you are basically providing growth capital.
Success of the PE Model
The private equity model in India has actually been fairly successful, which makes me proud as a brown person and having grown up around people calling my country 'Third-World'! People have done well in the last four or five years, and obviously the bull market in India, the equity markets, did help. If you look at the number of funds in India who are investing, it is huge. Five hundred-plus is the number estimated by a Director at Providence Equity, New Delhi. One can infer what has really happened in the last three or four years: there was a lot of hedge fund money. People were looking for a 'quick flip,' which was happening, so naturally people looked at pre-IPO deals. People were investing and looking to exit within a one-year or even a six-month time horizon, so a lot of those deals were happening. They were labeled as private equity deals, which is not a private equity deal in the true sense. That is not how we traditionally look at private equity, where a sponsor comes in and actually works with the management, helping to grow the business.
(Apologies for the abrupt ending. For the next issue, I'll go into further detail about the degree of competition, size of private equity deals in India and the effect of corporate governance)
