PE firms tap platform model to build scalable biz, boost efficiency

Private equity (PE) firms in India are increasingly leveraging the platform creation model to consolidate fragmented sectors, achieve economies of scale, and boost operational efficiency.

 

According to industry experts, this approach is gaining traction across various industries, becoming more mainstream in India’s PE landscape.

 

“When private equity buyout funds are interested in a particular sector because of strong economic tailwinds, and it's a very fragmented market with a few industry leaders, then PE firms, with the right kind of operating team, will roll up their sleeves and go through the difficult path of creating a platform,” said Vivek Soni, partner, private equity leader, EY India.

 

The strategy involves acquiring a foundational company and bolting on smaller firms to build scale at a lower cost than buying a single large asset. “These bolt-ons happen at a much lower multiple because traditional PE buyout funds don't buy these companies on a standalone basis as targets because they're too small for them,” Soni added.

 

One of the latest examples is Carlyle combining auto component manufacturers Roop Automotives and Highways Industries to build an auto parts platform. Other notable instances are O2 Power, a renewable energy platform backed by EQT and Temasek. Others are Edme Services, an insurance sector player majority-owned by Samara Capital, Maple Highways, a road infrastructure platform established by CDPQ (Caisse de dépôt et placement du Québec), and Horizon Industrial Parks, a logistics platform developed by Blackstone.

 

According to Bhavin Shah, partner, deals leader, Pwc India, sectors including healthcare and pharmaceutical, retail and consumer, and infrastructure are the most conducive for this approach.

 

PE players aim to broaden customer bases by cross-selling products across the platform’s various businesses and investing in new and promising areas to create additional revenue streams.

 

On the cost side, synergies are achieved by eliminating duplicate roles, standardising technology across businesses, and renegotiating vendor contracts to secure better rates.

 

Platform creation addresses the challenge of securing large buyout targets, as many companies in these sectors opt for public listings due to strong capital markets and higher valuations, said Soni.

 

He added that with limited opportunities, PE firms target smaller companies less likely to pursue an initial public offering (IPO).

 

They scale them up through acquisitions, and build larger platforms with potential for future public listings.

 

“Before we identify a certain sector for a consolidation platform play, we look at two things — is there any empirical data that is available that some strategy has been done in an effective manner, creating shareholder value,” said Abhishek Kabra, managing director (MD), Samara Capital.

 

He added, “Then we look at logically testing it. Is it cost synergies that come together or is it sales-related synergies and acceleration that can be driven? Also, what multiple arbitrage opportunities are at play.”

 

According to Shah, the risks associated with such a model include the challenges of integrating different organisational cultures.

 

Overestimating synergies may result in financial underperformance if expected efficiencies and revenue enhancements fail to materialise.

 

Additionally, complex and costly technology integration can create inefficiencies and data management issues if not implemented properly.

 

Negative events in one part of the platform can have a cascading effect, impacting the entire system.

 

“In India, an unorganised to organised shift is also leading to some of these platforms roll up plays that we have done,” added Kabra.         

Consolidating growth 

 

• PE firms adopting platform model to consolidate fragmented sectors, unlock synergies
• Strategy involves acquiring a core company and adding smaller firms to scale efficiently
• Broader customer base, cost synergies, better vendor negotiations are some of the key benefits from such models 
• Firms turn to platforms as large buyout targets opt for IPOs amid strong capital markets

 

Recent examples:

 

> Carlyle (auto components), EQT & Temasek (RE), Samara Capital (insurance), CDPQ (roads), and Blackstone (logistics)