A comparative study of the domestic and foreign franchise private equity firms investing in India

Abstract

The Asia-Pacific private equity industry had a spectacular year in 2017, bolstered by consortium transactions. Key forces identified behind the growth were the increasing investor confidence in the region due to improved macro climate and company owner’s overall greater willingness towards private equity funding. High returns have led to increased confidence among limited partners and have encouraged them to commit capital to fresh fundraising rounds. However, key challenges facing GPs such as lack of attractive deals and difficulty in finding a fairly valued company to invest in as the sector suffers from overvaluation continue to persist. Technology has shifted frontiers and it has been quite a challenge for funds to promise a turnaround or better performance unless they themselves are abreast of the latest trends and have invested in updating their skills and capabilities. In the Indian macroeconomic context, investor confidence has increased due to regulatory action and government stimulus to address NPAs, growing formal economy as a result of demonetization, government debt reduction through a broader tax base and improved spending efficiency to narrow budget deficit. The improved World Bank’s “ease of doing business” rank for India and an upgrade in Moody’s rating from the lowest investment grade is reflective of higher investor confidence. In India, more than two-thirds of the private equity funds that closed in 2017, met or exceeded their target amounts, and 39% took less than a year to close1 . This could be because statistics show that limited partners have been cash flow positive on investments for ~7 years running. Limited Partners have received US$1.20 back for every US$1 invested in 2014–17. A large number of first-time funds have emerged with a solid track record, motivating others to try their luck. The trend towards mega buyout firms has gained steam over the years. India-focused funds increased 48% in aggregate to US$5Bn. The top 10 exits in India together constituted 40% of total private equity exit value in 20172 . Consumer technology, BFSI and telecom had the highest exit activity. Although public market sales continued to be prominent modes of exit, consumer technology and media sector saw exits primarily via strategic sales. Post investment, a private equity fund must identify capabilities required, assess portfolio company teams in detail, and take steps to build commercial excellence. For this, finding talent that can deliver on the investment plan is critical, especially when the deal thesis requires a fundamental shift in strategy or operating model. They should look to close any gaps by hiring global or regional talent directors that can help evaluate target company, even from outside region or industry. Leadership issues at portfolio companies are common and have a major effect on value creation. The aim of this project is to evaluate differences (if any) between domestic and foreign private equity firms on the supply as well as the demand side. This was of great interest to the team because research in these areas is scant. The team wanted to contribute to the same by using empirical data to draw conclusions while improve their limited understanding of the industry.