The King's Roll-Up Gambit: Creating Billions Of Dollars of Private Equity Returns in India

India is unique, with over 75 million SMEs contributing over 1 Trillion Dollars to the GDP. However, India's highly competitive investment space has seen large private equity funds competing for price on mega deals (primarily real estate, ITES and healthcare) or venture capital fighting over high-growth startups.

This is where Roll-Ups come in - a largely untapped opportunity with the ability to deliver outsized returns. Rolling up established, high-free cash flow MSMEs in a platform structure, particularly in the Indian Consumer market, and generating value through Capital structure and Multiple arbitrages will drive multi-billion dollar returns in the next ten years. 

How Have Roll-Ups Fared Globally?

Roll-ups have been a globally successful formula that has created multiple multi-billion dollar companies such as John Malone's $10 Billion Liberty Media Empire, the $50 Billion Software aggregator - Constellation Software, $60 billion Waste Management business or Jim Ratcliffe's Multi-Billion Dollar Chemical empire, INEOS, and the list goes on. 

So, Who Should Be Rolling Up?

Private Capital has significant value-creation opportunities in all forms, from Large PEs to smaller capital providers. In particular, Search Fund Investors & Smaller PE Funds have significant potential to generate Alpha in the Indian markets via this strategy.

Entrepreneurship through Acquisition (ETA) has become increasingly popular globally as newly minted MBAs tap into the "search fund" model to search for privately owned businesses to acquire and lead. A record 88 search funds were launched in 2018 and 2019, according to Stanford's 2020 Search Fund Study. Search funds have also delivered high returns, making them a very attractive investment vehicle - the pre-tax return on invested Capital was found to be 5.5x, with a pre-tax internal rate of return of 32.6%. We see significant opportunities to leverage a similar model in India.

Roll Ups - Golden Key To Generating Market-Beating Returns In India

It is no coincidence that some of the biggest investment exits in India have been via roll-ups. For example, KKR's Max Healthcare exit for INR 9,185 crores — a 5x return in four years, the highest return deal by a PE firm in India- is a classic roll-up play. 

While there is no debate that India is the greatest investment opportunity of the 21st century, investing in India needs an India-centric approach. Large Indian businesses are amongst the sharpest operators in the world, and capital is readily available. Thus, a lot of capital is chasing the few low-hanging opportunities, driving prices high and lowering returns. The real opportunity lies in creatively creating platform structures that combine a Private Equity investor's mindset with an Operator's expertise. 

Value For All Stakeholders

For the SMEs, roll-ups provide access to otherwise unavailable sources of Capital. Traditionally, SMEs have faced several challenges in accessing funding in India. By transferring the funding responsibilities to a larger entity, roll-ups allow the business to concentrate on value generation instead of being caught up with the nitty-gritty of capital-raising. 

Through a roll-up, a platform can have 100 units instead of one and introduce an efficient and customised Capital Structure (thereby optimising the financing of the firm). This, in turn, can optimise the spread between the return on assets minus the cost of funding, thereby leading to greater value creation for all parties.

How a business/platform is financed creates significant value for the business. Through innovative capital structures designed specifically to bring down the cost of capital and create much larger positive net present values, platforms propel each constituent enterprise to greater success.

However, roll-ups are not a one-size-fits-all approach. Asset selection is the single most crucial factor for success. They can be considered for industries that stand to benefit from the Indian consumer boom over the coming decades and have:

AltG - The Financial Fulcrum Of The Indian Investment Markets

It is no coincidence that AltG's principals, Taponeel and Poornima, have expertise in roll-up structures across industries. As an M&A banker with UBS New York, Poornima worked with several billion-dollar chemical businesses in rolling up complementary assets globally. While Taponeel's penchant for roll-ups came from his "Leveraged Buyouts" class at INSEAD taught by Professor David Lai. The case of Tricon Restaurants' Pizza Hut roll-up in Belgium in the early 2000s was the perfect start. 

Taponeel adds, "The only way to successfully create these platforms in India is by using AltG's unique Investor-Operator Approach". Poornima mentions, "While VCs have seen a lot of capital flow in the last 10 years yet very limited financial success, private equity (PE) in India is mature and highly competitive, leading to price wars in most cases. Investors need to seamlessly blend the Left-Hand side and Right-Hand side of the balance sheet to create value via Roll-Ups." 

As we move forward to a new world order with India as the growth capital of the world, we at AltG see the Indian Consumer market generating market-beating returns for investors. Roll Ups are the tool to create multi-billion dollar investment exits in India.

Poornima Vardhan & Taponeel Mukherjee, head AltG, a financial services firm that Identifies and Executes High Growth Capital Allocation Opportunities."