Buyouts in manufacturing gain momentum

Five deals reported this year; there were only 13 between 2002 & 2012

Even as overall private equity (PE) investments in India have dropped 36 per cent in the first nine months of 2013, compared to the year-ago period, the latest data shows buyout deals in the manufacturing sector has gained momentum.

According to research firm Venture Intelligence, PE investors pumped $614 million into five manufacturing companies in 2013. This is significant considering that between 2002 and 2011, the manufacturing sector witnessed only 13 cases of PE investors taking control of their investee companies. There was no such transaction in the sector throughout 2012.

Among the major deals this year are KKR & Co’s $460-million investment in Alliance Tire in April this year; Blackstone’s $74-million infusion in Agile Electric; Citi's $56-million investment in Sansera Engineering; and Actis’ $24-million investment in Halonix Technologies in July this year. In June this year, Oaktree Capital had picked up a controlling stake in Cogent Glass but deal value was not disclosed.

Traditionally, entrepreneurs were averse to buyouts. However, they have become more amenable to ceding control amid slowing economic growth where cheap credit is hard to come by.

Buyouts have become common now. Even in mature Asian countries, where growth is slower and companies are more developed, many funds are seriously looking at the manufacturing sector for investment.

LotusPool Capital Mauritius (LotusPool), founded by former Actis partner Subbarao Telidevara along with Chandrasekar Kandasamy, former managing partner of ePlanet Capital, is one such fund looking for opportunities in this sector. LotusPool is set to launch a $125-million fund and International Finance Corporation is planning for a $25-million equity commitment.

Telidevara says, “LotusPool is focused on and structured to enhance exits of investments. Buyouts and control deals are part of this strategy.”

Lack of depth and variety in financing options is a major reason why more PE funds are used for growth funding. For example, vendor financing is absent in India. There will be more buyouts across sectors in the years to come, say representatives of PE funds.

In India, PEs have traditionally invested in technology, especially in software but now there are not many opportunities in this sector. This is also one of the reasons why PEs have turned to the manufacturing sector, especially the specialised manufacturing sector operating in the niche segment, the representatives add.

K Ramakrishnan, executive director of Spark Capital Advisors (I) Pvt Ltd, an investment bank, acknowledges this the view, adding: “Interest from funds to invest in the manufacturing sector has certainly gone up, compared to the previous years. They (government and investors) fundamentally realised manufacturing has got a good potential in this country.”

India is a productive country with enough natural resources to mine. However, the country lags in processing the mined minerals. Therefore, one of the key attractions for the investors would be process-related areas. “As a country, we have strong opportunities and capability to grow manufacturing sector, which we missed and there is renewed thrust on how to correct it by the government,” says Ramakrishnan.

According to him, one needs capital to translate any opportunity into a reality and PE is one of the best ways to get capital. PE funds look for paths to scale, high return, etc. Finding a strategic buyer in the manufacturing space is easy, he adds.