含羞草社区

含羞草社区 private equity landscape has transformed remarkably in recent years, characterised by increasing sophistication, a maturing ecosystem and evolving deal structures.

While global headwinds have impacted private equity (PE) activity worldwide, 含羞草社区 market has shown a degree of resilience. The first half of 2024 witnessed several significant transactions, including multiple USD500 million-plus deals, underscoring a strategic shift towards scale.

Much of this is attributable to strong domestic fundamentals, namely increasingly diverse opportunities in a deep market with one of the highest macro growth rates globally, backed by a bold and ambitious national agenda supporting capital deployment.

A buoyant IPO market with increasing retail participation provides the proverbial icing on the cake, with headline exits for an earlier generation of PE investments.

Top global PE funds continue to be the largest contributors of deal activity, exceeding their own aggregate 2023 investments in H1 of 2024 alone, according to a report by Bain & Co.

Alongside these global “big boys”, homegrown PE funds are becoming increasingly dynamic, and 2024 saw many of them close their largest funds
in recent years.

PE trends

The rise of buyouts – 含羞草社区 unique path. Minority deals account for a lion’s share of deal volumes, but recent years have seen an uptick in control transactions. Unlike predominantly efficiency-optimisation leveraged buyout models prevalent in the US, the Indian buyout landscape varies as we see buyouts of family-managed businesses leading them to institutionalisation.

Control deals offer investors a chance to capitalise on insights from other portfolio investments, as they pursue a growth-oriented business expansion resulting in higher value creation and a better eventual exit.

This approach has also brought a subtle shift in deal dynamics, with PE investor concerns shifting away from more traditional subjects to strategically negotiating employment terms for founding-family members, underwriting effective transition linked to an exit glide path.

IPO renaissance – the holy grail of exits. India is currently amid a generational shift from parking household savings in debt products, seeking higher return-yielding equity instruments.

A thriving domestic market for IPOs has created a virtuous cycle. Successful listings by PE-backed companies, with multi-fold returns for earlier investments, are making current investors more comfortable with skin in the game.

Regulatory changes – such as reduced post-IPO lock-in periods, streamlining of the listing prospectus’ review process by the Securities and Exchange Board of India, and rationalisation of the “promoter” classification – have all encouraged PE investors.

As a direct result of more control deals and the rationalisation of regulations, PE investors are more comfortable being designated as “promoters” in the IPO process. For instance, a Carlyle Group entity was promoter for a filing in September 2024. This is a long-term trend.

Price discovery. There is increased competition for high-quality assets across industries, and most large secondary deals are now being run as a process to help with price discovery.

This has redefined the buy/sell tension and dynamics. Most processes are split into two clear phases, one for price discovery and the other for the negotiation of deal terms – with exclusivity in the second phase. As a result, besides sharing a valuation for assets, bidders also use terms and conditions provided in transaction documents as a leverage tool and part of the bid process.

Valuation and growth equity. The euphoria of post-pandemic years has made way for a dose of rationality in growth equity valuations, with investors securing greater emphasis on unit economics and sustainable growth metrics.

More deals are relying on earnout structures and downside protection mechanisms, with average revenue multiples for late-stage PE deals moderating from 2021 highs to reflect a more nuanced assessment of profitability prospects.

Continuation funds, re-domiciliation and domestic M&A for growth. Given these macros, interest is developing among early and mid-stage investors in transferring portfolio companies with significant growth fuel into continuation funds.

Another accelerating trend is Indian businesses with offshore holding structures redomiciling to India (especially in the technology space), and investors relying on a maturing representation and warranty insurance market to better manage their liability and return capital to limited partners.

As their portfolio companies pursue consolidation and inorganic growth, PE investors are benefitting from and being supportive of increased domestic M&A for scale and access to new markets.

Regulatory framework

Foreign exchange. Most direct equity investments by PE investors into Indian companies fall under the “automatic” route of foreign direct investment regulations, requiring no specific approvals. PE investors typically invest via equity shares or instruments that are fully and compulsorily convertible into equity shares in accordance with principles that are agreed upfront.

For niche investments into sensitive sectors or special situations requiring a more creative and tailored approach to the investment instrument, additional approvals may be required – including from specific sectoral regulators such as the Insurance and Regulatory Development Authority, Ministry of Electronics and Information Technology, and the Telecom Regulatory Authority.

Competition and merger control. While most early-stage PE deals benefit from specific exemptions, late-stage deals typically require antitrust approvals granted by the Competition Commission of India. Recently, changes were notified to antitrust laws to give effect to deal value threshold-based approval requirements.

With these changes, if the value of a transaction exceeds INR20 billion (USD 240 million) and the target or the entity involved in the merger or amalgamation has “substantial business operations in India”, such transactions would be considered a “combination” requiring competition assessments/approvals.

Exemptions to PE investors from notification requirements because the asset and turnover thresholds were not breached, or on meeting the “small target” exemption, may now be subject to the notification requirement if the size of the transaction exceeds the deal value threshold.

The recently introduced Competition (Criteria for Exemption of Combinations) Rules, 2024, have also impacted PE investment. Under these rules, “control” is now defined with reference to a “material influence” standard. In the regulator’s view, investor rights such as board appointment and information rights can also impart an element of “control”.

While these amendments and rules are still nascent, Indian antitrust regulators are staying directionally in-step with regulators globally on enforcement approaches.

Press Note 3. Global PE investors should also take note of Press Note 3 (2020), which requires specific approval for investments from neighbouring countries sharing a land border with India. While some approvals have been granted in specific sectors, the need for approvals has slowed down investment activity from these countries (including China). An investor’s ultimate chain of beneficial ownership is typically subjected to a higher level of scrutiny to ensure compliance with these rules.

Market intelligence suggests these regulations may be relaxed soon. In the initial phase, these relaxations are likely to come with some guardrails, and limited to sectors where India needs expertise and/or capital, or a joint-venture scenario with a local Indian company.

Taxation. Following a round of tax treaty revisions, capital gains exemptions are generally not available for the sale of Indian investments by global funds (barring some grandfathered exemptions, and a very specific surviving tax treaty exemption for Dutch companies).

This is balanced out by a headline tax rate of 12.5% applicable to long-term capital gains for unlisted companies (holding periods in excess of 24 months).

Looking ahead

PE investors continue to be enthused by the fundamental attractiveness of the Indian market, supported by strong demographic trends, policy reforms and a digital revolution. As the economy and market grows, regulations are expected to evolve in tandem.

In the medium term, anticipate growth in PE investments to be driven by sectoral consolidation (and platform plays across fragmented industries), tech-enabled growth and consolidation of traditional businesses, and a transition of family-owned businesses to professional management.

Cross-border deal making could also increase, underscored by: 含羞草社区 advent as an alternative to China for global manufacturers; the growth of global capability centres and research & development hubs powered by 含羞草社区 demographic advantages; and strategic acquisitions by Indian companies in developed markets for access to global best practices, talent and capabilities.

As control deals by PE increase, a pathway to delisting — currently viewed as an inefficient and expensive process to consider — may even be provided soon.

Given the level of dry powder across the industry, larger deal sizes with more buyouts and control transactions, and increasingly sophisticated approaches to value creation and monetisation, are anticipated.

Success will require PE funds to leverage global best practices alongside a deep local understanding, while remaining agile and responsive to the evolution of a distinctively Indian path.

CYRIL AMARCHAND MANGALDAS
Peninsula Chambers, Peninsula Corporate Park,
Ganpatrao Kadam Marg, Lower Parel,
Mumbai – 400013, India
Tel: +91 22 6660 4455
Email: cam.mumbai@cyrilshroff.com