Secondly, auction processes, albeit more focussed ones, will remain the preferred way to raise capital and facilitate exits. For instance, at one point during the past few months, over 31 live auction processes were simultaneously ongoing for deals in the Indian pharmaceuticals sector – almost all of which received multiple serious bids from motivated buyers. Finally, a substantial churn across the senior leadership rungs of various prominent PE funds is currently at play in the Indian markets. The new incoming leadership, armed with access to substantial funds and redesigned investment mandates, is strategically positioned to compete aggressively for high-quality assets in the relatively shallow marketplace. Consequently, valuations should see dramatic escalations.

Going forward, as more and more companies in the Indian markets seek to restructure their capital structure and divest non-core assets, PE funds will also have significant opportunities to acquire distressed assets, both, through their portfolio companies, and by collaborating with strategic partners (including existing management teams). In terms of exits, with a record number of successful IPOs in December 2020, IPOs will become the desired mode of exits for PE funds in 2021, with auction processes continuing to be the vanilla alternative. We can also expect to see some investors trying to extract the highest possible values from their investments, by launching dual-track auction processes.

From a legal perspective, to bridge inevitable valuation gaps, deals going forward will rely on permissible structured components, such as downside protection through convertible instruments, earn-outs, deferred compensation and investors’ rights to acquire additional stakes at pre-agreed valuation methodologies. Potential investors will also focus heavily on comprehensive due diligence, with the increased focus on anti-bribery, anti-corruption and anti-money laundering laws, and ESG (environmental, social and governance) compliances. Further, even in competitive bid scenarios, contingency clauses (such as material adverse event/material adverse change clauses) and conditions precedent provisions will be heavily negotiated, as sellers increasingly demand deal certainty.

Additionally, the growing trend of reliance on warranty and indemnity insurance to gain competitive advantages in highly-contested auction processes will also continue. Furthermore, clarity from the government, on the ambit and applicability of the Press Note 3 regulations, will considerably help in easing the market-wide uncertainty seen in 2020, and provide much-needed regulatory certainty to PE investors, going forward.

Given that PE investor interest has stayed consistently strong through the worst of the pandemic in 2020, there is every reason to be confident that, with the end of the pandemic in sight, PE deal activity in India will be on an unprecedented upward trajectory in 2021.

This article was originally published in India Business Law Journal on 8 February 2021 Co-written by: Iqbal Khan, Partner; Amrita Rana, Associate. Click here for original article

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