As far as mergers and acquisitions (M&As) and private equity (PE) buyout deals in India are concerned, 2017 has been fairly active, with successful initial public offerings (IPOs) providing smooth exits for PE funds which have sold shares worth $1.17 billion in 2017 in the market. The figure is almost 25% higher than the $935 million in stock sold through IPOs in 2016.
In an interview, Kaustubh Kulkarni, managing director and head of investment banking at JP Morgan India Pvt. Ltd, talks about the various factors that have driven the large M&A, PE and IPO deals in 2017 and gives his views on the deal market in 2018. Edited excerpts:
There is a surge in the IPO market and valuations are quite high. Is this a trend?
Deal activity has seen a surge this year if you look at the quantum of capital-raising, both in terms of number of deals and amount raised per IPO. We are no longer talking about Rs400-500 crore IPOs. The average IPO size today is around Rs1,500-2,000 crore, which indicates that the size of companies coming into the market is large. The size of capital-raising this year is meaningfully higher as compared to previous years. Also, if you look at equity-raising activities, the private sector in 2012-14 raised a limited amount through the market. During 2013-14, many follow-on transactions took place. Now IPOs are forming a larger part of capital-raising while follow-ons are slightly lower. Liquidity in the market is high, interest from FIIs and MFs is high and on the supply side, deal activity has also increased.
But the IPO market seems concentrated on a few areas like insurance and other financial services. What’s your view?
Many of these insurance companies have existing founder shareholders who have invested over 10-12 years. Enormous amounts of time and capital have been invested in those sectors and now, these businesses are being partly monetized. As far as the investors are concerned, they are focused on quality of companies and not sectors. Investors want companies with high-quality balance sheets, strong track record and exposure to domestic consumption. Companies driven by consumption themes are finding it relatively easier to raise money than others. Many companies in the infra space are not coming in yet for IPOs but things may change next year.
There was a large round of PE investments in companies in 2012-14 when the public market was not easily accessible. There’s a good opportunity now for the PEs who invested for 4-5 years and want to exit with scaled up companies. They are most focused on getting good value. Going forward, I think next year as well, activity levels in the IPO market will remain high. There will be a change in investors’ perspective as they will look for new supply in the market from follow-ons apart from IPOs.
Today, interest in inbound M&A deals is less, especially in areas such as pharma and healthcare. What could the reasons be?
The reported deal volumes are not meaningfully lower than last year, ie. they are comparable. Sectors like technology have seen larger PE deals. We have seen unlisted tech companies like Flipkart, Paytm and Ola raise large amounts of growth capital. There have been large real estate deals and these add up to a big number for inbound capital flow. In sectors like pharma, generic companies in the US themselves are going through a valuation correction. So, the chances for highly leveraged global generic drug makers who can do large deals in markets like in India are limited today. While mid-sized domestic deals in pharma are happening, I wouldn’t say domestic consolidation in pharma is a large theme yet.
In relation to outbound deals, just to share a perspective, last year, Chinese companies had done outbound deals worth $250 billion across sectors. This year, they did less than $100 billion due to the stringent norms by the Chinese government.
This year, Indian companies may have invested much less than $3 billion for outbound deals. You need to have a meaningful understanding of global business before you invest. Only those Indian companies with anchor assets internationally or having some international presence are evaluating international acquisitions and many are very focused on what they can do domestically to expand their business.
What is your view on the ongoing National Company Law Tribunal (NCLT) process and growth of distress funds and asset reconstruction companies (ARCs)?
The first outcome of the NCLT process will be known by early next year. Whether ultimately transactions get concluded through domestic buyers, foreign strategic investors or specialist funds, the NCLT cases will get gradually resolved and NPAs (non-performing assets) will get cleaned up. The pace of new cases referred to NCLT will increase. Some of the NCLT cases are also a good opportunity for global credit funds/domestic ARCs who can assemble a management team comprising of senior industry veterans to turn around a business. In summary, this will be an interesting and new area of growth for the banking business.
Why have growth investments by PEs dipped while buyout transactions are growing?
The primary reason for this is that the size of PE funds and firepower they have is growing. We have seen the size of funds dedicated to Asian markets increasing to $8-10 billion compared to around $4-5 billion earlier. There are more dedicated Asia funds being raised in addition to global funds. Also, in markets like India, we now have several private equity investors who have a very healthy track record with exits and strong return of capital. This has also given them a high degree of confidence in pursing the larger-sized buyout opportunities as and when they come. In such cases, they also have much better control over the business and exit terms, making it a more compelling opportunity for them to pursue.
How significant are pension funds and what role can they play in the Indian economy?
The relative size of these funds and the capital they can deploy is enormous. They have also done really well across global markets but currently have very little exposure to India, allowing them to meaningfully expand the size of their investments here. Also, they do not have a legacy of poor investments given that they are relatively new to India. They generally look at businesses where size and scale is large and where the ability to hold assets for a much longer period is an important differentiator. Many of them have anyway been important LP investors in larger infrastructure and private equity funds, have a much better understanding of the business in India now and are looking for more direct investment opportunities typically for significant minority stakes.