Tata, Birla target mid-size PE deals

At a time when funds of private equity (PE) firms with proven records are shrinking globally, India’s two top business groups — Tata and A V Birla — are targeting to capture small and medium-size deals. While the Tatas are looking for PE deals of about $50 million or less, the textile-to-telecom diversified Birla group is eyeing deals not more than $25 million.

“We are interested in transforming the companies, find nuggets of gold in coal mines,” said Tata Capital Private Equity Head Shailendra Bhandari.

“We do not want to do any investment where we are passive, where we do not have a board seat or not have a significant stake,” he added.

Tata Capital is banking on its ability to source deals by judiciously exploiting the ecosystem of suppliers and customers of as many as 98 operating companies of the salt-to-steel conglomerate. Its large companies such as Tata Motors have hundreds of suppliers.

The group plans to invest about 15 per cent of the first corpus on its own as anchor investment. Tata Capital had earlier announced its plan to raise $400-500 million as its first fund for the PE business.

“With a unique opportunity to source deals and capability to evaluate them, we think we can transform the company,” said Bhandari.

Apart from the Tata Capital team, the PE business wants to use the expertise of group establishments such as Tata Strategic Management Group, Tata Quality Management Services and Tata Management Training Centre, besides the resources of larger operating companies of the group.

“These small companies can otherwise never have such quality guidance,” he said.

As raising of funds gets tougher, the A V Birla Group today said that it had committed 40 per cent of the $250-million corpus it planned to raise for its PE fund. The group is also looking to leverage its strength to source and evaluate the deals. “There is expertise within the network of the group that can be extended to portfolio companies,” said Bharat Banka, Managing Director and Chief Executive Officer, Aditya Birla Private Equity. “Certain best practices can also be extended to portfolio companies to enhance the value of their businesses,” he said.

About 70 per cent of the 306 private equity deals announced in 2008 were of the value of less than $50 million, which is considered mid-size. The contribution of such deals in 2007 was also of 70 per cent, though the total number deals was higher at 405 compared to 2008.

“The traction for mid- and small-size deals continues to be there,” said Dhanraj Bhagat, Partner, Grant Thornton, an international accounting and advisory firm.

“Large deals would require large funds, which is difficult to raise in this market,” he said.