Private equity (PE) is developing into a major player in the Indian economy. The presence of PE teams attuned to the particular requirements of local businesses has contributed to its attractiveness as an alternative source of capital.
But, Indian companies are now increasingly global in outlook, whether they are involved in outsourcing activities or seeking new markets for their products or services.
It is essential for them to be able to work with PE teams that not only have a deep knowledge of the local business environment, but also have the relationship orientation, cultural flexibility and global reach that will help them realize their potential and, ultimately, deliver better financial returns.
Investee companies view PE as more forgiving and willing to take a longer-term perspective as opposed to a public offering in a market that has zero tolerance and is unforgiving. “However, it is forgiving but not forgetting!” maintains Raj Dugar of Fidelity Fund Management. “The key issue here is patience.”
The current bullish nature of the market has brought on a great deal of new capital, and there is a danger of getting carried away. Similar market dynamics are at play across Asia, making the bull market a topic of much debate in PE circles.
There is a fine line between capitalizing on growing markets and growing businesses and staying disciplined in terms of valuations. There is clearly no easy answer—many companies are growing 20–30% per annum, phenomenal growth by most standards. And, what’s more, they’ve been doing it for a while.
Hedge funds acting like PE firms are not as widespread in India as they are in the US, but they are getting increasingly active. With the rising market, many hedge funds are seizing the chance to act like PE (without the value added), coming in either just pre-IPO (initial public offering) or slightly further back than that, and looking at an early exit opportunity.
However, while there is an element of convergence, there is a belief that over a period of time, the differences will come out and hedge funds and PE houses will revert to their respective positions.
There is also a view that in India it can sometimes be harder for a company to raise equity worth $5 million (about Rs20 crore) than to raise $100 million. The latter seems to be more attractive, with the former seen as too small a sum to spend time on. “Nevertheless, these smaller deals can give some element of protection in the euphoric climate we’re in now,” said Dugar.
While PE companies need to proceed with caution, investee companies need to broaden their understanding of PE.
The difficulty for the investee company is that it is getting patient capital through PE, but at some point in the future, it will no longer be independent. Some day it is going to be acquired, or there will be an IPO. This is particularly seen in family businesses, which may be open to the idea of taking capital, but then hesitate when the potential investor raises the inevitably of an exit.
Darius Pandole of New Silk Route said, “There is always some faction that says: ‘Yes, we think it’s a good thing,’ whereas others think: ‘Well, we’re not sure if we’re ready for that; we’ve been in business for 30 years and we’ve dealt fine as a private company’.”
Historically, it has been very easy to list in India, with 5,000-plus companies which are public only in name—some are virtually private companies, except they happen to be listed.
Many of these companies trade their shares only once every six months, which proves that listing and liquidity have very little to do with each other, despite the fact that liquidity offers better valuations and greater financial flexibility.
This question of liquidity is a crucial point of debate with companies considering PE. The ability to create liquidity is high on the PE firm’s agenda, whereas investee companies may be looking to PE for a variety of different reasons, such as creating a diversified capital base, or simply getting help in funding a change of ownership.
“PE companies therefore need to spend a lot of time persuading investee companies that they need people dedicated to investor relations to educate the market about the company; not just investors in India, but overseas as well,” explains Nainesh Jaisingh, Standard Chartered PE Fund.
PE investing goes beyond mere portfolio investing to actual involvement in the company, and to a great extent, determining its future.
While there are no defined rules for exits, the goal is to realize capital appreciation.
An exit, however, is only justified when a true value proposition is identified, and everyone stands to benefit. What is critical is that the exit objectives are compatible among owners. Only then can it result in true value creation.
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Edited excerpts from a round-table discussion on private equity organized by Spencer Stuart and attended by leading practitioners in the private equity sector. The session was chaired by Abhay Havaldar, General Atlantic, and facilitated by Tom Neff, chairman, Spencer Stuart. Anjali Bansal is managing director at Spencer Stuart India.