How late-stage PE firms see market and elevated valuations impact exit strategies

Late-stage and growth private equity firms have been in the spotlight over the last year because of the increasing number of deals between private equity firms and companies, deals between private equity companies, and deals involving promoter exits.

Late-stage PE funds typically invest in companies that have proven their business models and have a track record of revenue generation. Growth PE funds specialise in investing in companies that have demonstrated significant growth potential but may still be in the early stages of development.

At the IVCA conclave on February 26, senior PE executives spoke about the segments of the market they were bullish on, and the issue of expensive valuations.

Sectoral view

KKR Managing Director Rohan Suri said his fund was bullish on the consumption upgrade theme in India due to favourable demographics. These include healthcare, financial services, and consumer goods.

“There’s also emphasis on globally competitive export industries like tech services, pharma, and manufacturing, where Indian companies can consolidate their global leadership position,” he said.

Founder transition, a rising trend 

Among the key themes in the market right now, Ashish Kotecha, Partner at Bain Capital said that founder transition was one. “Founders across sectors are becoming increasingly comfortable with the idea of bringing in a value-added partner who can bring in global best practices and help companies scale. There is increasing flexibility and openness on the part of founders to partner with funds in constructs where they share or cede control – largely when there is a high degree of alignment on long term goals. Private equity can offer founders a lot of flexibility as they contemplate succession issues.” he said.

A valuable ally

KKR’s Suri said the entrepreneurs and founders were beginning to recognize the type of capital private equity represents.

“PE Capital can serve as a valuable ally for families navigating succession and generational transition. Bringing in a partner who is long-term oriented, capable of professionalizing the business, bringing in talent, and aligning in terms of outcomes positions PE as an asset class well-suited to play that role,” said Suri.

He added that with the Indian capital markets have become deeper and more mature over the years, it is allowing PE funds to exit some of their profitable investments. This in turn is giving confidence to newer PE players to enter the fray.

Controlled exits

On the issue of cutting back on controlling stakes through open market block dealks, Shweta Jalan, Managing Partner at Advent International said that initially she was skeptical of this approach.

“However, experiences like our own Crompton trade, where we had control and sold a significant stake, have demonstrated that controlled exits can indeed provide genuine avenues, whether it’s a control or minority transaction,” she said.

“It offers comfort, establishing a legitimate exit route. For those with substantial stakes, it’s crucial to approach the exit methodically over three to four years, ensuring no disruption and having the right board and management team to carry the company forward,” she said.

The valuation factor

On how late-stage private equity firms were assessing elevated valuations in India, Sudhir Variyar, Managing Director at Multiples Alternate Asset Management, said that cycles were inevitable and there could be phases when valuations looked expensive.

“In the long run, for the foreseeable future, India presents a multi-decadal growth opportunity that will continue to be discounted. Hence, there is no reason to anticipate a complete collapse in valuation to levels seen in many other markets,” he said.

“The real question then becomes, how do you factor in some degree of valuation deterioration and still construct a compelling investment case? The growth opportunity allows you to make these cases, there are different types of deals to consider. Sometimes, investments are directed towards ownership transition, while at other times, they are focused on platform creation. In many senses, the approach is not just about paying up the valuation; it’s about creating that value,” Variyar said

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