PE funds take fancy to holding companies

Reasons: Exposure to a clutch of projects, wider risk spread.

With deal flow in the private equity (PE) space gathering momentum, a clutch of PE funds are finding it attractive to invest in holding companies rather than in standalone entities. The holding company model has become quite popular, with these funds looking to get exposure to several projects and companies, as opposed to just one investment. A case in point is Blackstone’s recent investment in Jagran Holdings. Blackstone invested Rs 225 crore in Jagran Holdings which has several publications such as Dainik Jagran, I-next and City Plus under its fold.

Blackstone is not the only one. Recently, New Silk Route, KKR( Kohlberg Kravis Roberts) and Standard Chartered Private Equity pumped in $200 million (around Rs 900 crore) in Coffee Day Holdings. Coffee Day Holdings operates several companies such as Cafe Coffee Day, Coffee Day Hotels and Resorts and the broking firm Way2Wealth Brokers.

Experts said there could be diverse reasons for a PE fund to select a holding company. The main reason being exposure to a bunch of projects. While the fund may have to pay a premium valuation for holding company, the risks are much less compared to single investments. “Sometimes, PE funds do not want to have direct market exposure, as it is volatile and reduces the value of their investments. At the same time, there are chances of appreciation, too. In such a scenario, they can invest in a holding company which will give them listed as well as unlisted exposure,” said Sanjiv Krishan, executive director, PricewaterhouseCoopers.

Some of the sectors where this structure is more prominent include power and infrastructure wherein several special purpose vehicles come under one company. Recently, a clutch of investors led by Morgan Stanley Infrastructure Partners, Everstone Capital, General Atlantic, Goldman Sachs and Norwest Venture Partners invested $425 million in Asian Genco, a Singapore-based holding company that owns many hydro, thermal and non-conventional power generation assets in India.

“By investing in a holding company, the PE firm and the promoter are fully aligned on all the businesses. If, on the other hand, a PE firm only invested in one of the several businesses, then there could be a conflict. The PE firm would want the promoter to spend the maximum amount of time running the business, where the PE firm has invested, while the promoter may also want to look at his other interests,” said Vikram Utamsingh, head of markets and private equity advisory at KPMG.

Some of the other examples are Providence Equity Partners’ $640-mn investment in Aditya Birla Telecom, which owns tower assets, and Axis Private Equity’s investment in Shalivahana Green Energy. From a promoter’s perspective, there is easier capital allocation, as he can utilise funds for new businesses which need it the most. However, PE funds could be caught on the wrong foot if the holding company does not have a clear listing plan.

“A holding company investment needs more due diligence than a standalone investment and sometimes revenues may not be well-defined. Also, if the holding company does not have substantial stakes in the projects that it owns, there could be problem of liquidity,” said Alok Gupta, chief executive officer, Axis PE.

“Liquidity is an issue with holding companies. Also, a holding company will probably get lesser valuation at the time of exit because operating businesses with stable cash flows are liked more by investors,” said Deepesh Garg, director, O3 Capital.