Private equity funds taking new route
Private equity funds in India are taking a new route. People tracking the sector say that large and mid-sized private funds are increasingly making enquiries with successful family-owned firms in smaller towns as valuations of large enterprises are surging and there are more players chasing the same companies. According to investment bankers and chartered accountants (CAs), groups like Blackstone, ICICI Venture and Citigroup’s private equity arm have been talking to closely-held family-run companies in towns such as Trichy, Coimbatore and Visakhapatnam to partner with the promoters in growing their businesses which have reported annual growth of 30% to 40%.Most of these firms have revenues ranging from Rs 100 crore to Rs 400 crore and are in diverse businesses like textiles, hospitals, engineering, auto components and power equipment. “With the influx of large private funds into India and with everyone chasing the same companies it is getting difficult for them to gain entry into such firms. Also valuations in such companies are rising which eats into their returns,” said one banker. “It makes more economic sense for these funds to invest in companies which are growing now and will give them higher returns five years hence.” Companies such as the Trichy-based Cethar Vessels, KPR Mills of Tirupur and Vasan Medicals, which has one of the largest eyecare hospital network, are all typically old family-run businesses that have been making profits for over 30 to 50 years.
According to CAs who have been closely associated with such companies, there is increased acceptance among the second generation promoters — sons of the original founders — to talk to private equity funds. “This wouldn’t have been possible, say 15 to 20 years back, when the original promoter was still active, as such family-run businesses are wary of allowing strangers as shareholders,” a CA firm, which has audited these companies for over 50 years, told ET. Private equity firms raise money from large investors like pension funds, universities, foundations and other investors and use the money to buy companies that can be strengthened. Often the firms bring in new management or develop new strategy to increase profits. Most of the private equity investment is only for three to five years.
The move by PEs to go to smaller towns is in line with their current philosophy. Consulting firm Bain & Company, in a report on private equity trends in India, had said the country’s economy is largely built by closely-held family businesses and that funds need to look at emerging industry niches, including pharma and automotive components.
