How PE firms are transitioning from investors to managing companies

Financial sponsors and private equity firms are increasingly acquiring management control and running Indian companies as traditional family-run businesses face succession challenges or seek growth capital. Investments by financial sponsors in Indian companies have doubled in the last five year.

Janaki Krishnan

Quick question. What is common to Manipal Hospitals, Mphasis, HDFC Credila, Suven Pharma, Eureka Forbes, Sona Comstar and Coforge? Keen corporate watchers would have spotted it – these are all Indian companies in which financial sponsors such as private equity firms have or had a controlling stake, and took on the mantle of promoter in many cases and are running the companies.

The trend of PE firms and financial investors acquiring management control, controlling stake and running companies has been gaining ground over the years and is set to intensify as traditional family-run businesses in India find themselves without successors, or need growth capital to take their organisation to the next level. Or, in some cases, the younger generation is not interested in the family business.

In sale transactions where promoters are looking for potential buyers, financial sponsors are increasingly competing with strategic players to participate in the sale process and take control of the asset. In the listed space financial sponsors have shown increased interest and are willing to take control. The numbers tell the tale. Over the last five years, investments by financial sponsors in Indian companies have doubled, on an annual basis, compared with the previous five years. Over 2019 to 2023, average annual investments by financial sponsors were $42 billion compared with $20 billion annually in the five-year block of 2014 to 2018.

Total buyouts where financial institutions took control were $55 billion in deal value in the period 2019 to 2023, which was double the value seen in the previous 15 years. Total buyouts in the period 2014-2018 were worth $18 billion and over 2009-2013 just $5 billion. “The trend of financial investors becoming promoters of listed and other companies has become a lot more evident,” said Sourav Mallik, MD & Deputy CEO of Kotak Investment Banking. He pointed out that domestic and overseas private equity firms are increasingly comfortable operating in India, managing, and controlling enterprises as well as subjecting themselves to the rules and regulations governing listed firms.

The reasons for existing promoters to sell majority stake in their companies and sometimes cede control are varied and myriad.

For instance, in 2016 when printer and PC maker Hewlett Packard — split into two companies and struggling for survival — was looking to sell its stake in Indian software company Mphasis, a number of global technology companies had shown interest in it, but it was Blackstone that came in and picked up the stake. It then became a promoter in 2021 when it pumped in $2.8 billion to consolidate its holding further as it saw long-term value in the company. Mphasis shares, which were trading in the range of ₹404-622 in 2016 are currently trading close to ₹2,600, vindicating the PE’s investment thesis.