From legacy to liquidity: Why private equity firms are courting India’s family businesses

Apart from full buyouts, there have been deals like Singapore’s Temasek picking up a 9-10 percent stake in snacks company Haldiram’s for about Rs 8,500 crore, underscoring the increasing interest of private equity in Indian family-owned businesses.

No heir, no problem

While there are several factors which convince families to sell their businesses, their next generation not being interested in continuing the business, and instead finding better avenues, has been the most recurring theme across sectors.

Take for instance VIP industries. Its Promoter, Dilip Piramal told Moneycontrol that “a change of management had become a necessity” for his company as the current management was not yielding desired results and the firm was ceding market share to rivals, amid other challenges.

He, however, believes VIP is a generational company and will continue to grow.

“I have retained my 20 percent stake because I feel the long term future of this company is fantastic. And who will do it better than private equity? Their overall objective is to increase value,” Piramal added.

Piramal said his two daughters were not interested in running VIP Industries and by then he had realised that there is so much money in private equity.

However, a maturing PE ecosystem means these firms now find it quite useful to buyout Indian businesses and turn them around.

“The emerging trend in these families is that the Millennials/Gen Z want to build something of their own. Given the lack of a clear succession plan, Indian families are becoming more comfortable to hand over significant stake/control to a PE firm…while riding the upside on their residual stake,” Sridhar Sankararaman, Managing Director of Multiples Alternate Asset Management, said.

While tech investing is hot, PE firms are also warming up to the idea of investing in traditional Indian businesses.

“From an investor’s standpoint, there is greater interest to invest in conventional businesses now than earlier. Some sectors are becoming more organised and potentially consolidated, presenting interesting avenues to build scale,” said K Ramakrishnan, Senior managing director, Spark Capital Advisors.

Also, platform-isation and value-chain integration opportunities are unfolding in certain manufacturing businesses which is triggering deal momentum, he added.

Over the years, PE buyouts are also increasing because Promoters are opting to sell to a PE instead of getting fully acquired by a larger player.

“A phased exit with upside, lesser concerns on conflicts, cap table restructuring , consolidation benefits and retaining some flavour of entrepreneurship are driving them towards PE,” said Venkat Subramanyam, Founder, Veda Corporate Advisors, a mid market investment bank. Veda had advised deals like KPN, Dr Agarwals, Malladi Drugs among others.

“It also helps that in most situations PE Funds are outbidding strategics and also swifter.”

Significant PE deals in India

Age not just a number

VIP Industries’ Piramal, who turns 76 later this year, also said that he was running out of fuel to keep operating a publicly listed firm.

Piramal is not alone. Investors, who have brokered such deals, said several family businesses opt to sell to PEs because they are turning old.

“In several cases, families also sell their businesses because a promoter turning old wants to give their younger generation money to live instead of a business to run,” VT Bharadwaj, general partner, A91 Partners, a private investment firm.

The A91 team, which was formerly at Peak XV Partners (earlier Sequoia Capital India) brokered deals like selling Vini Cosmetics to KKR and others.

If not a full exit, Promoters also look towards PEs to take their company public.

“A Promoter, in their 50s, wanting to take their company public knows they cannot run it for another 15-20 years. Someone in their mid-40s would still be able to do that but it becomes a challenge if the promoter ages beyond a certain age,” Bharadwaj added.

“That is when they think of selling to PEs.”

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Great Indian compounding story

While there have been several success stories where family-owned businesses have fared well under the wings of PE firms, there have been a few ones that turned sour over differences in opinions, management style and more.

Deals turning sour, however, is not always the reason why talks do not materialise. There are multiple cases where Promoters walk out of deals because they felt they were being lowballed on the valuation front.

A large private market investor told Moneycontrol a pharma company had received a buyout offer of Rs 700 crore in 2013. The Promoter group however decided against the deal. The company instead decided to build and scale on its own.

Cut to 2023, the company raised fresh capital at a valuation of Rs 8,000 crore, a massive 10X increase in 10 years, and then went on to issue shares at Rs 11,000 crore valuation several months after.

“That is always a fear while deciding whether to sell a business or not. ‘What if I am leaving money on the table?’ is a question that haunts a Promoter. That is especially true in companies that can be part of the great Indian compounding story,” the investor said on the condition of anonymity.

All said and done, the handshake between PEs and Promoter-led business seems less transactional and more transformational. For PEs, these legacy-driven companies offer resilience and ready market trust. For family businesses, investor partnerships offer a shot at scale, structure and in many cases, survival. Whether driven by succession gaps or strategic foresight, this unlikely alliance is quietly redrawing the map of India Inc.