There has been phenomenal growth in the value of private equity (PE) investment in India over the past decade. With an expanding domestic market and additional opportunities brought by globalization, the impact of PE on Indian business is likely to increase further in the coming years.
Improving the quality of boards
There is a growing perception among promoters that PE firms can add value on several fronts—raising corporate governance standards, providing global connectivity, building executive teams, improving organizational capability, enhancing evaluations and creating liquidity.
The PE firm can thus help a company create a proper corporate governance framework and put the right knowledge-based tools in place to monitor the business effectively.
An Indian School of Business-Venture Intelligence February 2007 report on the impact of PE on the Indian corporate sector since 2004 showed that PE-backed companies grew at a significantly faster pace than non-PE-backed companies and faster than market indices such as CNX Midcap and the Nifty.
However, there has not been significant pressure on companies to improve the level of director independence, although the regulators have recently addressed this issue through the new Clause 49. The sheer number of listed companies, together with those that may be preparing to list in the future, means that a huge pool of board directors is needed if governance standards are to be raised and standards of independence improved.
Finding leadership talent
Traditionally, boards of family-owned businesses have consisted almost exclusively of family members and friends. For these firms, the board meeting is purely about compliance and the real debate and decision-making happens outside the meeting. Adjusting to a more rigorous style can be extremely difficult for such companies.
Private equity firms recognize the importance of finding outside directors who can provide the knowledge, expertise and experience necessary to help steer a company through its next stage of growth, or towards a public offering. However, this search is not the only human capital challenge. Finding executives who can fit into a business that has been controlled by the founder or the family patriarch is equally difficult. The human capital aspect of PE is critical. PE firms often play a strong influencing role in helping companies attract talent, commissioning search activity, and helping promoters to interview and assess talent.
In the US, the number of senior corporate executives who are attracted to PE as an alternative and lucrative career step is remarkable. They are either interested in running a portfolio company or becoming an operating partner, bringing their operating experience to portfolio companies and adding value.
The same level of eagerness among corporate executives may not be true of India, but PE firms need to put a great deal of energy into finding the right talent to run the businesses they invest in.
“If you limit your possibilities to people you know and feel comfortable with, you’re not necessarily going to get the best talent,” says Nainesh Jaisingh of Standard Chartered PE Fund.
In a family-run business, the patriarch who does not want to leave the company, insisting that he should be succeeded by a family member, will not be aware of the 20 other people who could do the job better. And this is where PE firms need to step in.
Considering the search process
Search firms are increasingly being used in India to identify candidates who meet the criteria for critical leadership positions, and to conduct rigorous due diligence on them. When an internal succession candidate is being considered, particularly within a family-owned business, external executives can also be put forward against whom the internal candidate can be benchmarked.
In the US and in other markets where executive search is widely used by private and public companies alike, the majority of CEO searches involve at least one internal candidate. Executive search firms can be involved in several steps of the succession process without actually doing an external search, including assessing internal candidates and, on behalf of the board, discreetly benchmarking them against potential candidates in the market, without ever compromising the confidentiality of the situation.
Private equity firms can, and do, have a positive influence on investee companies when it comes to finding leadership talent, or improving the composition and governance of boards. What is important is to fit the right people in these roles—those whom the company can really trust, and who have the right kind of professional qualifications. And with their global experience, PE firms are well positioned to make this happen for their investee companies.
This is the concluding column in a three-part series on private equity in India.
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.
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