Baring Private Equity Asia-EQT (BPEA-EQT) announced two headline transactions in as many months. In June, it teamed up with Chrys Capital to buy 90% of Credila, the education loan arm of HDFC Ltd, for $1.1 billion–the largest-ever private equity (PE) buyout in India in the financial services sector.
The following month, it invested $650-700 million for a 60-65% stake in Indira IVF, the largest provider of fertility services in India and among the top five globally in terms of annual in vitro fertilisation (IVF) cycles.
Baring Asia and Sweden’s EQT announced a $7.5 billion merger in 2022 to create the world’s third-largest PE fund group.
“We continue to remain positively inclined to make more investments. We are not going to maintain that same pace of investments every month, but we are still inclined to making more investments in healthcare,” said Jean Salata, CEO, BPEA-EQT. “We just announced Indira IVF and we did AIG Hospitals in Hyderabad last year. We are still open to doing more in financial services, and of course tech and IT services has been the main thrust for us.”
As per reports, Baring has also been approached for buying the promoter stake in Cipla, either partially or in its entirety.“The total amount we have invested in India is close to $7.5-$8 billion of equity. And that probably makes us one of the largest foreign investors in the country,” said Salata in an exclusive interaction with ET. “Our fund from which we are investing still has a lot of dry powder left, and that is reflective of the deal pipeline that we have.”Last year, Baring raised $11.2 billion in a pan-Asia fund–its eight and among the largest ever to deploy in the region. However, GIC of Singapore, whose $700 billion of assets makes it among the largest institutional backers of PE firms, last month warned that many of the tailwinds for the sector have come to an end as the golden age for the asset class is replaced by tougher market realities. Salata believes the global flux is actually creating newer avenues.
“It’s actually a positive for Asian private equity and for our programme,” he said. “A lot of the returns in PE globally have been generated by low interest rates and leverage and multiple expansions that happened in public markets. That did not really happen in Asia. If you look at our strategy in India or the recent deal in Indira IVF, we are not using any leverage at all. We are generating those returns through earnings growth. And that’s the key differentiator for Asia, and for India specifically.”
BPEA EQT has recorded 17% net IRR and multiple of invested capital (MOIC) of 2.6x.
“Our ability to generate such returns is very much achievable if you are exposed to the high-growth sectors and regions in the world,” he said. “We see quite a bit of growth left in the (Asia) region and in India, and this will make the Asian PE asset class on a relative basis even more interesting compared to the rest of the private equity industry globally.”
According to Salata, what is happening globally is a differentiation between investors who drive value rather than simply act as a capital provider. “Hands on, active investment strategy is the key to standing out. Are you working directly with management, getting into a company to change things?” he said. “Passive investment strategies will not work going forward.”
However, Baring is open to forging partnerships, like in Indira IVF where the founding family–Ajay Murdia and his sons–continues to be a large shareholder along with Baring, even though the fund will become the controlling shareholder.
“We are happy to work with the founders but retain controlling economic interest. It helps us to manage our risks and exit strategies better,” said Salata.
Traditionally, defensive sectors like tech services and pharma–which rely on export earnings–have been a buffer for fund managers during volatile periods. Is Baring also pivoting, focussing on the India consumption theme rather than exports, when global geopolitics is causing global supply chains disrupt and economic nationalism take centre stage?
Salata disagrees. He argues that the fund is now more confident of investing in newer, consumer-facing sectors in healthcare or financial services than its legacy sweet spot of tech services.
“We are focusing a lot more on the domestic consumption story, not because we feel less confident about the technology services story. It still has a long runway,” said Salata. “Just the amount of spends one will see from customers in implementing AI will drive growth in the space. But you are right, we want to diversify our exposure to the aspirational Indian middle class demographic and their growing spending power. The stable economic and political environment is also giving foreign investors like us confidence. It’s a good virtuous cycle that we are going through in the market.”
Deploying capital is easy, but most private equity funds have suffered in India during exits. Baring’s entry into healthcare, for example, was by valuing Indira at $1 billion (close to 20x EBITDA), making several industry peers wonder about the future upside.
“We have had several multi-billion exits. The biggest of them all was Hexaware. We have successfully taken CMS public. We have partially exited Coforge (former NIIT Technologies) in the stock market with healthy returns,” he said. “If you see our recent deals, they have been relatively competitive. The clearing price was within 5% of each other. There wasn’t a massive gap in value. We will not try and buy things at a discount. We pay market price but we make our money through value creation, and that’s where having a controlling stake comes handy. Also, these assets, like Credila or Indira, are premium assets in terms of size and scale and market position, so we will pay full price to prevail.”
Credila, for example, has grown by more than 25% CAGR, said Ashish Agarwal, partner, BPEA EQT. It also has among the lowest gross NPA numbers among any lending business in the country.
On Indira IVF, for the first time after announcing the transaction, Agarwal said there is potential of mid to high teens of growth.“For businesses to maintain scale, going down the price curve may not be the most feasible strategy. One can, but it will only be temporary.”
Fertility services is essentially a local industry. But Indira has over the years managed to diversify across India, with branches in 20 states. The next phase of growth will naturally be beyond borders.
“It is natural for the company to think of some of the neighbouring geographies where there is a demand for similar services is something to consider,” said Agarwal. “Conducive regulation and scale will be the two key catalysts for that decision both organic and inorganic.”
Agarwal said, “Specialised fertility services chains are already gaining market share, especially over doctor-owned, doctor-operated outlets. The ART Act (Assisted Reproductive Technology) of 2022 puts guardrails around the physical infrastructure, processes as well as the donor and recipient combination. Large companies will be able to deliver on compliance better. It will also lead to consolidation in the market, much like the global trend. But value accretive opportunities need not only arise from M&As, but better geographical access, technological capabilities. There can be various ways to maximize synergies.”