Zydus Animal Health buyout catapults Multiples into the big league

Last week, a consortium led by domestic private equity company Multiples Alternate Asset Management pulled off one of its largest deals by buying out Zydus Animal Health and Investments — the second largest player in this space — for Rs 2,921 crore. (Zydus Healthcare was a fully-owned subsidiary of Cadila Healthcare.)  

This one deal has catapulted Multiples into the big league among home-grown PE firms. Multiples will finance the deal through its third — and largest — fund-raising round of $700 million that is expected to be closed soon. Talks are on for the closure of another deal of around $60 million, which will also draw money from the new fund. The focus now is to go for larger-sized deals, in many of which Multiples plans to take a controlling interest and play a key role in managing the business.

Multiples’ deal ticket size in the first fund was only $30 million and in the second around $50 million. “Consistent with market opportunities, we expect to do more deals in the $75-100 million ticket size. Our aim is to invest in nine to 12 companies of which three to four will involve a controlling interest,” said Renuka Ramnath, Multiples founder, adding, “We expect to raise money for the fourth fund by early 2023.” In the last two funds, however, it did only five control and near control (stake of 50 per cent) deals amongst a total of 21 deals.   

Ramnath, an ICICI Venture veteran, sees growing potential in taking a controlling interest in Indian companies. She said there are three reasons Indian family businesses are looking to PE players to sell. First, the next generation is not interested in running the business. Two, they are breaking the group companies into core and non-core assets and want to monetise the latter for future growth. Third, in businesses built by multiple founders, some of them merely want to monetise their holdings and relax or, in cases where there is a difference of opinion among co-founders, exit with minimum disruption.

Illustration: Ajay Mohanty

“Transition of ownership from families to institutional investors is an inevitable progression. The interesting feature is that these businesses have high growth potential and are seeking new aligned shareholders. PE is a natural choice in this transition," Ramnath pointed out.

But given the management bandwidth involved in controlling stakes, Multiples has hedged its bets by making investments in other areas that include digital start-ups such as gaming company Dream11 (which it has exited partly), Delhivery (exited substantially), HR start-up PeopleStrong and Vastu, a housing company. In some of them, it is piggybacking on entrepreneur strength and creativity by taking minority stakes and sees the possibility of exit via an IPO. It is now planning to step up its activity to scout for technology companies like those offering Software as a Service, or SaaS, where the business is global.

In many aspects Multiples’ strategy varies from global PE players. For instance, it is looking aggressively at roping in domestic financial institutions as well as Indian family offices to raise funds. “We see a huge sense of purpose in creating a source of domestic capital. Mining the domestic market is a very patient effort but we see tremendous strategic value in having both domestic and global investors in our funds,” Ramnath explained.

So far, Multiples has been able to rustle up 25 per cent of the money for the third fund from domestic sources (insurance, non-banking financial companies, or NBFCs, National Infrastructure Finance Ltd, some family offices) compared to only 10 per cent in the second fund.

Ramnath is focusing on consortiums with other domestic PE funds and wealthy investors to go for bigger deals. She pointed out that while foreign PE funds have deep pockets, most domestic fund founders started out during the same time and have great chemistry with each other and can easily pool resources. For instance, in its latest deal, Multiples has roped in serial investor Rakesh Jhunjhunwala's RARE Enterprises as a partner.  

But Multiples has a more conservative approach towards business as well as its investors. For instance, it does not take too much leverage to fund a deal. In the Zydus deal, it is looking at a (borrowing) leverage of less than three times its EBIDTA whereas global PE funds generally go up to five or six times. Secondly, it prefers to deploy the money in the fund in three to four years and return capital to investors on a weighted average life of four years. It aligns with global PE players, however, in terms of average returns they give to investors — for the third fund, it is looking at a portfolio return of a consistent 20 per cent.

Yet there have been challenges thrown by Covid-19. For instance, Multiples has taken a substantial bet in PVR Ltd (the only company to have got investment from both first and second fund) but the lockdown and the second wave of the pandemic has had a serious impact on the revenues of the exhibition business. Ramnath agreed that it is a short-term challenge; consumers will continue to demand experiences such as movie-going, so the business model is intact.

Covid-19 also impacted the process of raising fresh funds. Ramnath said the impact has been mainly on new investors who wanted to come in but could not conduct the customary on-premise due diligence. "That had little impact on the existing investors, who knew us, our track record and the Multiples team," she added.  

But she also conceded that there have been a lot of management lessons from the Covid-19 crisis, the key one being hastening companies towards digitisation because services delivered digitally can access a larger market.

Ramanth’s big bet on Indian companies and domestic capital has a sound conceptual base. The question as she strikes bigger deals and takes more risks is whether she will be able to maintain consistent returns to her investors.