Majority-control transactions up 23% in 2018 on IBC wave, fear of NCLT

On paper, majority control is owning anything beyond 50%, but it's really about getting the right team in place, shaping strategy, changing the CEO, and injecting new capital on a pro rata basis

The age of control deals is here to stay, as companies come under the Insolvency and Bankruptcy Code (IBC), get referred to the National Company Law Tribunal (NCLT) and the changing fortunes of industrialists evolve to accept external capital as well as give up management control of companies they cannot make perform.
 

According to data from VCC Edge, the value of control deals went up by 23 per cent from $4.8 billion in 2017 to $5.9 billion in 2018 even though the deal headcount dwindled. Seen another way, based on the data of a host of private equity (PE) funds, last year companies in five control deals (of over $100 million) invested $710 million. Over 2018 most global PE funds went the majority route. 

What defines majority control? On paper, it’s anything more than 50 per cent ownership but in actuality it's the ability to get the right team in place to shape strategy, change the chief executive officer (CEO), and inject new capital on a pro rata basis.

Last year, global investment firm KKR individually ponied up $1.2 billion to acquire majority stakes in Analjit Singh’s health care assets (in Max India) as well 60 per cent control in Chennai-based Ramky Enviro Engineers for around $530 million. 

It wasn’t alone. AION Partners, which tied up with JSW, bought 74.3 per cent in stressed asset Monnet Ispat for Rs 2,400 crore, and Advent International bought a majority stake in PET manufacturer Manjushree Technopak. Just last month Max India's board approved a majority stake sale (51 per cent) of Max Bupa to True North.

Historically, 90 per cent of PE investments have been minority deals, says Divya Sehgal, partner with True North. “When betting on a company it’s important to provide capital to fund growth, attract outstanding management processes, and build high-quality governance, all of which is easier to do when in a majority position,” he says, adding that True North has also done minority deals but predominant value has been driven by long-term, majority stakes. A source says that for the bigger funds “it’s never been about putting half a billion dollars in India — but more about implementing best practices but that’s hard to do with a single board seat,” he says. “Today, as promoters see credit markets evaporate and watch their friends go bankrupt, they find that PE has a role to play in improving business.”

True North changed its name from India Value Fund for that reason: To project a long-term perspective with dominant investing instead of just a label that stands for capital allocation. Expectedly, majority deals call for majority mindsets. “You have to have the patience to last across economic cycles, and the life of the fund has to be long enough, which is not always easy,” Sehgal says. “In the Indian ecosystem, saying you are the majority stakeholder means you are the promoter.” Which means for institutions, figuring out who is giving the promoter guarantee — which, by the way, a PE fund can't because it's an asset manager — has taken time to rationalise. 

Why the shift from minority deals? For starters there's a train of thought among the country's leaders who prefer to sell than be referred to the NCLT? “Bankruptcy avoidance,” is how one investor describes it. “Longer-term, it’s a combination of succession and family disputes but straightforward corporate divestiture is not a big flow.” 

Storied promoter groups may have been great in the 1990s but may have slipped, and want to find a way to climb back. Another trend among the top 20 business houses in India is that the leadership realises with scores of ventures, one doesn’t always have the ability to manage them all as well as the flagship. “So the promoter will turn around and say, come in and buy 30 per cent or 40 per cent, bring in that energy and they fix the core issue,” Sehgal says. An example of that is DHFL selling its majority stake in Aadhar Housing Finance to PE major Blackstone to slash debt.

Other changes are at play. “This is a tightly knit society, and because of that PE players have been reluctant to take control because past relationships with government, regulators or clients have been driven and connected through promoters,” says Mohit Saraf, senior partner with law firm L&L Partners, who oversees private equity. Saraf adds that has also changed because of reduced interference from promoters, as well as negative surprises on corporate governance across corporations in recent times.