Evaluating the efficacy of platform acquisitions by PE firms in India

Abstract

The Indian PE/ VC industry accounts for 1.7% of the country’s GDP and is growing at a CAGR of 44% over the past 3 years. India has received PE/VC investments worth USD 198 billion since 2009, of which 56% has been received from 2017. Exits too have had a good run, with over 10 billion USD worth of exits being clocked each year since 2017. Notwithstanding the decline in GDP growth estimates by various sources, in the global context, India is expected to remain an important destination for PE/VC investments and as yields in OECD countries continue to decline, asset managers are expected to increase allocation to emerging markets. India is likely to be an important beneficiary of this shift. Private equity firms undertake M&A through platform or add-on acquisitions. A platform acquisition refers to the initial acquisition a private equity group makes to enter an industry with the intent to then roll up, or acquire, other smaller companies in an industry. When a company expands into a new market, the expansion often comes in the form of a platform acquisition. The company entering the new market usually targets an existing business with an already sizeable base of operations which then becomes the platform from which to launch further expansion. Platform companies tend to be market leaders in their respective geographies or functional niches, with an experienced management teams. Such acquisitions differ from traditional acquisitions in terms of the higher premium commanded by the target company. Private equity players follow what is known as a “roll-up” strategy where a higher premium is paid to acquire platform companies and subsequent acquisitions are made at a lower cost.