KKR’s environmental services deal is among India’s largest

India’s favourable demographics coupled with fiscal and economic reforms are paving the way for more big-ticket private equity deals.

This week, KKR struck its first deal in India’s environmental services sector, acquiring 60 percent of Ramky Enviro Engineers Limited, for approximately $530 million through a combination of primary and secondary investments. The deal would value the Hyderabad-based company at an enterprise value of $925 million, according to a statement from the firm.

Following this deal, KKR has invested more than $3 billion in private equity deals in India since 2006.

KKR’s investment in Ramky, which came from its Asian Fund III, the 2017-vintage, $9.3 billion pan-Asia fund, comes amid prime minister Narendra Modi’s ongoing push towards creating better environmental management through the Swachh Bharat (Clean India) Mission. Swachh Bharat is a pan-India movement seeking to create “a clean India” by reducing pollution, improving sanitation and boosting living standards in cities and villages.

“REEL is the only comprehensive environmental management company offering end-to-end environmental and waste management services across India,” said Sanjay Nayar, member & CEO of KKR India, in a statement. “We are excited to partner with REEL’s work uniquely supports the Swachh Bharat Mission, and our team is pleased to invest in the growth of a company that provides critical services and infrastructure to reduce pollution and address the needs of India’s expanding urban population.”

A series of measures introduced in India over the past few years, including a unification of taxes under the new Goods and Services Tax, the demonetisation exercise conducted in 2016 to crackdown on illegal cash, as well as the government earmarking $32.4 billion to recapitalise bad loans in public sector banks, have improved investors’ outlook on the country.

A European insurer that backs India-focused GPs told Private Equity International that the domestic private equity market is benefiting from India’s positive macro story. “Although entry valuations have increased over the years, GPs are making bigger and bolder bets in the market, especially in the healthcare and consumer space.”

Indeed, total private equity deals in India reached $26.4 billion in 2017, a 57 percent jump from $16.8 billion worth of deals made in 2016, according to the India Private Equity Report 2018 published by Bain & Company. The average deal size also increased 95 percent for deals greater than $10 million in the same period, driven by big-ticket deals in consumer tech and business, financial services and insurance.

Last year, India’s median deal multiples value also reached a record high of 12.8x, more than that of Asia-Pacific transactions at 11.5x, according to Bain & Company.

“We have seen a trend in India of bigger and more complex deals, particularly since 2017, which is not surprising given the maturation of the private equity market in the country,” said Ian Ho, a partner at law firm Simpson Thacher & Bartlett. “We expect this trend to continue based on positive demographic, economic and structural indicators.”

Private equity firms looking to capitalise on the size of India’s market and improved macro fundamentals will find many bright spots across different industries in the near-term. By 2025, India’s waste management sector for example is expected to be worth $13.6 billion with an annual growth rate of 7.2 percent, according to a report from professional services firm Dezan Shira & Associates. Meanwhile, growth opportunities in the country’s financial services market are also on an upward trajectory. The insurance industry is planning to increase penetration levels to five percent by 2020, and could reach the $1 trillion mark in the next few years. In addition, 100 percent foreign direct investment in non-banking financial companies was allowed in 18 NBFC activities in 2016, which has driven growth for mortgages, microfinance and unsecured loans.