‘Financial sponsor now ready to become promoter’

Where are you viewing the deal flow?

Today, you have the top 15 corporates. Then, there’s this middle layer, which has also been very active in dealmaking. And then, this whole bunch of financial sponsors have now become quasi-promoters. So, they’re in the middle of a lot of investment activity. Acquisitions, sales, they’re investing. So, they’re divesting, and so there’s a lot of activity. The composition of customers has evolved and changed.

So, what advice are you giving them?

Our view over the years, if I tell you what we have a day job, is it’s not product solutions anymore. It is about solving specific customer queries or customer problems. Let’s say a private equity investor has a business he likes, but he doesn’t like the business as a whole. We help them spin off this vertical they don’t want. In case of corporates, they are either disinvesting assets or raising capital. So, I think those topics are well known, and large groups are investing, divesting, or spinning off.

How are these corporates raising funds for their acquisitions?

You couldn’t have had a better time than today on the quality of banks. Banks are clean. I think this is going to hold you in good stead for the next 8-10 years. They are not as big as global banks. But I think a range of 10 banks is now available, clean, large; They can do great things. These banks are doing a lot of acquisition financing. If you look at FY22, acquirers raised around $32 billion for acquisitions, which was only $11 billion in FY21. The number is huge. Acquisition financing is now developing into a niche product.

New age economy companies are another bucket where heavy dealmaking takes place. How do you see it?

India needs new age companies. If I look at the new era from a distance, in the last five-eight years all these have brilliantly come up to solve certain shortcomings or problems. But it so happened that everyone fell into the trap of esoteric evaluation. Those valuations were clearly not just on paper, they were also backed by investments. In 2021, I think we lost the plot somewhere. But today, everyone has become much more realistic. Those assessments are not sustainable. That is the new reality. Secondly, what was a growth driver has now turned to growth and profitability. People want to see some Ebitda, profitability, some unit economics before they say, okay, you can go to the markets, or I’ll fund it, I think the money is there, but people have to prove some profitability. Will be So, in my judgement, you will see selective M&A because unless one and two or two and three (number players) consolidate, they cannot go to the markets, and they cannot get funding. Otherwise both will die. So, this is the new reality.

But, we don’t see people accepting lower valuations.

No they are. And one thing I admire about these new founders is they’re very realistic. They are young, they are not sentimental, they are scientific. I think they will do what they have to do to survive. Some will sell, some will consolidate, I think you’ll see a different kind of action. We’re getting initial inquiries, but not enough for me to tell someone like you that at this location, or at that location, that will happen.

Do you see sustainable businesses emerging from new age fintech firms?

I think so too. I think new age fintech is an absolute necessity for India. But they will have to pay more attention to profitability and unit economics, competitive landscape and craving for growth. They have to reduce a bit. I think this is already happening.

Are you seeing a correction in the markets after the Mankind Pharma IPO?

I don’t see a thematic revival. But I see a revival slowly happening through successful examples. You know, we did the Mankind IPO in a way that should be a catalyst for the revival of the primary market. If you ask me, will Mankind 20 revive the IPO? I do not think so. But looking at the ingredients of Mankind, those kinds of companies that are dominant, that are good, that are profitable, they should all be excited to go to market.

But the pipeline for the markets is huge. How many of them would actually be able to tap the market?

If you look at the pipeline of IPO filings with the Securities and Exchange Board of India (SEBI), we have 1 trillion of the total pipeline has been filed. Of this, 65% have been cleared by SEBI and about 35% are in the pipeline. I do not think so 1 trillion will happen. So, it may be a very small subset but there will be a revival. Two things that I find very specific about the market, I think that the fair value and the bid-ask spread among investors will not change. That’s where I think a lot of it is stuck. You have to be practical. PE investors are also gearing up. We are seeing record arrivals. A lot of sponsor records are sitting on dry powder. Some have raised large Asia and India focused funds and are looking to land multiple platform deals as they are now able to build a team. I think it will continue. And sponsors are now ready to become promoters. It’s the comfort factor every time they’ve made an open offer that they’ve acquired… so they’re generally okay with the ecosystem.