Brand new second-hand

Private equity firms in India are adopting the secondary buyout and giving it a local spin.

Two recent deals in India illustrate an increasingly common phenomenon: the Indian secondary deal.

In April, Bain Capital paid $61 million for a 30.7 percent stake in Lilliput Kidswear, a manufacturer and retailer of children’s wear, alongside TPG Growth, which invested $26 million. The duo’s deal provided an exit for domestic fund manager Everstone Capital, which had made three investments worth a total of $26.8 million in Lilliput since 2006.

In August, TA Associates paid a reported $36.3 million for a 16 percent stake in Delhi-based pathology and diagnostics company Dr Lal Pathlabs, representing a partial exit for seasoned (if not actually local) Indian GP, Sequoia Capital. Sequoia had acquired close to one-third of the privately-owned Dr Lal for INR500 million (€8.4 million; $10.9 million) in 2005.

Of course, a rise in secondary buyouts has been documented in the broader Asian and global private equity markets this year. For example, recent deals in Australia have included the A$660 million (€475 million; $619 million) secondary buyout of CHAMP Private Equity-backed higher education provider Study Group by US firm Providence Equity Partners; and the secondary buyout of Quadrant Private Equity-backed temporary fencing provider ATF Services by CHAMP. Further afield, in Europe, there has been a 58 percent jump in the number of secondary buyouts this year, compared to a 23 percent increase in the number of buyouts generally, according to data from Thomson Reuters.

But in India, like the majority of private equity deals, the secondary transaction remains focused on growth investments and minority holdings. Several GPs targeting deals in the sub-$30 million deal space have reported that in the past year they have been approached by an increasing number of larger funds offering an exit route for some of their portfolio companies.

Indeed, in a country where the typical company is still family-owned, most private equity deals have traditionally taken place in the sub-$50 million bracket: in fact 85 percent of private equity transactions so far this year fall into that category, according to statistics from private equity research organisation Venture Intelligence.

Therefore for larger funds which need to deploy equity in larger bite-sizes, secondary investments are likely to constitute an increasingly important source of deals.

“One of the things you see in India is the difficulty to achieve scale,” says Nirav Kachalia, Hong Kong-based managing director of investment at Morgan Creek Capital Management Asia. “There are lots of large funds, locally or globally, who will depend on the eco-system of smaller funds needing to sell to larger funds.”