There’s a shift in how M&A deals are structured: Luis de Lucio of Alvarez & Marsal

Reflecting on the geopolitical shifts, the rise of disruptive technologies, and the burgeoning demand for high-level expertise, Luis De Lucio, managing director and head of growth markets, Alvarez & Marsal (A&M) and Himanshu Bajaj, managing director and co-country leader of A&M India, explore the vast opportunities and challenges in India’s rapidly evolving market landscape. De Lucio and Bajaj discuss how India is increasingly becoming a focal point for global corporations, besides delving into A&M’s unique approach to talent acquisition, the firm’s focus on sectors such as healthcare and energy, and why they see private equity (PE) and mergers and acquisitions (M&As) as pivotal to India’s future.

With geopolitical uncertainty at its peak, disruptive technologies such as generative AI emerging, and challenges with inflation and interest rates—how do you see the narrative around large and small businesses evolving?

Luis: A&M started as a hardcore restructuring and turnaround firm, so we’ve always been hyper-sensitive to movements in interest rates, leverage, and economic cycles. When I joined the firm 21 years ago, restructuring was all we did. Today, about 20% of our business remains in restructuring, which gives us a deep visibility into what's happening in the markets. The market has been anticipating a recession for the last year and a half. It was supposed to hit the U.S. and then spread globally, but that hasn’t happened yet. And while the U.S. government tries to keep the economy steady, there’s still talk of a potential recession. The world is becoming less globalised, which is a shift we’ll have to navigate. And of course, no one really knows the full impact of AI yet, but we’re prepared to support companies as they adapt to these challenges.

Is this a new normal where businesses need to live with elevated costs?

Luis: It’s hard to say definitively. If you had asked me a month ago, I would’ve said that rates may remain elevated or even go up again, with inflation rearing its head but we recently saw the rate reduction. So, while I’d love to give you a clear answer, it’s difficult to predict. What we do know is that businesses will have to adapt, and PE may become more attractive as traditional financing becomes less affordable.

Post-pandemic, a lot of Indian companies cleaned up their balance sheets and raised equity. Do you think we’re now in an era of peak return ratios for both lenders and borrowers?

Himanshu: It’s hard to say for sure, but from a cyclical perspective, I don’t think we’ve reached the peak yet. The past 10 years have been fantastic, but I believe there’s still a lot of opportunity in the market. While there will always be cycles, I think we’ve got a few more years before we hit the peak in terms of return ratios.

Which sectors offer huge growth opportunities, especially for PE?

Himanshu: Consumer and tech are indeed two obvious and massive sectors with competitive advantages for India. But beyond that, the healthcare and life sciences sectors present enormous opportunities. They have been, and continue to be, huge prospects for growth. India is well-positioned to leverage leading technologies and solutions, and private equity is drawn to that. Financial services, too, is another sector that’s seeing significant interest, not just fintech, though fintech is often bundled under tech. Broadly speaking, financial services continue to attract capital into India.

In addition to that, I wouldn’t disregard industrials. They offer a great opportunity, provided some of the bigger sponsors and promoters are open to bringing in private equity partners. There’s a lot of activity, especially when you look at sectors such as energy transition and the emergence of new energy platforms. We're still far from our targets on renewables; we're talking about aiming for 500 gigawatts but currently being at 200 gigawatts. This means there’s a need for new business models, new entrepreneurs, and a lot of funding in that space. So, there's a lot of excitement, whether it’s renewable or even hydrogen—though hydrogen has been discussed for a long time, we’re still waiting for more use cases to materialise. But funds are looking in that direction.

Similarly, mobility space, particularly electric mobility, is another area to watch. We’re still in early stages, but between the development of vehicles, battery technology, and the broader ecosystem, there’s immense potential. More and more funds are now specialising in these sub-sectors.

We are also seeing large industrial houses acquiring startups…

Himanshu: Large industrial houses buying out startups is a different play from traditional private equity investments. One of the key challenges for large organisations, especially as they scale, is innovation. Take global consumer goods companies, for example. When you’re dealing with businesses in the Indian context that are growing from zero to ₹100 or ₹200 crore, innovation often struggles to get the support it needs. Within large organisations, innovation tends to get lost, while entrepreneurs who are focused solely on that innovation can thrive. Large companies often recognise that innovation can be taxing to manage within their existing systems. So, instead of building everything internally, they scan the market for new ideas and overpay for acquisitions once the startups reach a certain size. If they can then leverage their own distribution networks, it makes strategic sense. So, many large companies have adopted the strategy of continuously scanning the market and investing as needed, and I think that will continue.

On the other hand, private equity and venture capital (VC) funds are operating within a well-defined ecosystem—early seed rounds, mid-seed rounds, and so on. Over the last year or two, some funds were hit by mistakes made during the earlier boom, but if you look at cycles in places such as Silicon Valley, these are natural occurrences. Each cycle makes the market stronger. Last year may have been tough, but we’re already seeing significant deal activity despite a bullish IPO market putting stress on valuation expectations.

Do you think high interest rates are making PE more attractive in this environment?

Himanshu: Absolutely. While PE funding is expensive, it provides long-term capital, which allows companies to undertake significant projects with a long-term view. So, these two forces—strategic value creation focus and the scarcity of affordable bank or debt financing—are creating an environment where private equity thrives, especially for long-term players.

Luis: I’d add that we’re also seeing a shift toward more buyout funds, as opposed to growth funds. As a firm, we’re one of the leading players in the buyout space, particularly in the U.S. and Europe. We manage private equity funds that specifically focus on buyouts, and this model is gaining more traction in India as well.

Do you see India entering a new phase, perhaps not an era, but a phase of increased M&A activity due to the repositioning of businesses? Whether it’s the large or mid-sized companies, do you think we’ll see a spree of M&As in the coming years?

Himanshu: It's tough to predict exactly, but I think we’re at a potential inflection point. We saw a lot of M&A activity at the beginning of the year, but it has slowed down since then. However, as market picks up, I expect that we’ll see more M&A deals. We’re already investing in preparation for that. As businesses continue to reposition themselves, M&As will become an essential tool for scaling and innovation.

Luis: I agree. There’s a shift happening in how deals are structured, particularly when it comes to private equity. Five years ago, we saw a lot of minority stakes in companies, especially in growth-stage firms. But now, private equity funds are increasingly seeking majority control. They want to influence the outcome and direction of the companies they invest in. This shift is apparent across various sectors, but particularly in healthcare, where operational control is vital for creating value. In India, many private equity funds are becoming much more involved in driving these companies forward.

Will there be a skew towards control transactions?

Himanshu: That’s right. We’ve seen this shift in healthcare more than any other sector. It’s reached an inflection point where the market has responded, and you’ve seen big exits with impressive multiples. Over the last six to nine months, healthcare has been one of the toughest sectors to navigate, but the potential for private equity is enormous. More and more firms are focusing on how to create long-term value, how to improve operational efficiency, and how to drive growth.

Luis: In fact, I would say that many PE firms have learnt over the last year that they need to be more hands-on. Previously, they would sit on the fence and see what the promoters were doing. Now, they’re much more proactive in shaping the company’s strategy and operations. In some cases, they’re walking away from deals if they don’t believe they can take control or significantly influence the outcome. This has been one of the biggest learnings in recent years.

Himanshu: Exactly. And that’s a good thing for the market. We’re seeing private equity firms step up and take an active role, which ultimately benefits the companies they invest in. Whether it's healthcare, financial services, or industrials, this more hands-on approach is helping companies grow in ways they couldn’t if the investors were passive.

Himanshu, how are you looking at stressed portfolio business post IBC era?

Himanshu: While we’re excited about the opportunities in India, but to be clear, we do not see our main opportunity coming from the distressed market only. We’re here to help companies that want to improve, not just survive. The IBC has been effective in cleaning up some bad loans, but our focus is on companies looking to get better in specific industries. We're starting from a small base, but the market is much bigger than where we are now, and we’re focused on growing steadily.

To quote your co-founder, Bryan Marsal, who recently described the firm as being 'like hungry dogs outside a butcher shop,' how would you contextualise that comment in today’s context?

Luis: I've heard that term so many times from him and since I've known him for 21 years, I know exactly the context of that. It wasn’t necessarily considering the U.S. market or the European market. It was more about where we are as a firm. For a long, long time, we were very conservative, very organic — a firm that was growing with healthy growth, highly profitable, with an excellent reputation in the spaces we operate in. But because we were so conservative, we always shunned inorganic growth. Over the past five years, and particularly over the past three years, I’ve been lucky enough to be in the middle of this shift. The market has come to us, creating demand for services that bring in high-end talent. And there has been a lot of disruption in the top consulting firms for different reasons globally. And now, we are that dog sitting outside the butcher shop, except I wouldn’t say we’re waiting for scraps. Today, we’re inside the butcher shop, choosing what quality meat we want to take.

Is that part of your strategy in India as well, poaching the best talent from the Big Four?

Luis: Over the past 10 years, we’ve been recording a CAGR of around 20%globally. That kind of growth, particularly over the past three to four years, can’t happen without bringing in external talent. Till five years back, our growth was purely organic — promoting existing partners and deepening market penetration. But we made a very conscious decision that to keep up with this pace, about 12% of our growth would need to come from bringing in talented people from the market. In two years alone, we’ve added around 400 new managing directors globally. This includes hires from the Big Four, and that’s because two of our biggest business lines — our transaction advisory and our tax team — are both Big Four-heavy. But a significant number has also come from firms such as McKinsey, BCG, Kearney, etc especially as part of our industry practices driving transformation and performance improvement work. Our approach is tailored to the specific needs of each country. For example, in India, 70% of our work is in performance improvement and transformation. So, when we’re looking for talent, we’re more likely to target firms such as McKinsey, Bain, BCG, Accenture and Kearney, rather than the Big Four. However, when we’re looking at transaction advisory or tax, we definitely go after Big Four talent. The talent mix depends on the nature of the business and the local market context.

What is the roadmap that A&M will follow in India?

Luis: There is a massive opportunity ahead of us. We’re investing heavily here because we see space for a firm such as ours that does things differently. Our focus is on helping companies that want to get better, not just those that need to survive. So, while we are still sub-scale in India, it’s only a matter of time before we start capitalising on the broader market. We have over 350 employees in India consulting team and looking to grow the business 5x its current size over the next five years. We have signed up 15 new managing directors this year and are looking to triple our MD count by the end of next year. In addition, we're investing in building a global capability centre in India. We started it last year and have already grown it to over 250 people and are aiming to double in the next 12 months to support growth across markets such as Europe, Southeast Asia, Australia, and North America.