The Indian economy has been enjoying a sustained growth rate of around 8% a year. This boom has attracted the attention of private equity (PE) houses that have been participating in an unprecedented number of investment deals.
In sharp contrast to when PE funds invested in India from a base overseas, many firms have now established a presence in the country, spurred by a bullish market and some spectacular and well-documented exits.
This has brought into focus the importance of understanding local markets and working closely with promoters (families or controlling shareholders), as well as the benefits of local decision-making.
The particular situation in India—characterized by family-owned companies, a huge listed sector, widely available capital, and yet a relative lack of liquidity in the market—also means that PE firms need to position themselves as partners if they are to become the preferred source of investment capital.
Beyond their financial contribution, PE firms need to be able to add value, as required, in strategic, operational and human capital matters.
The Indian PE market is different from that of Europe or the US in that small family-owned and family-managed businesses account for a high proportion of the market and, therefore, investment opportunities.
While the average deal size in India is significantly smaller than, say, in China or South Korea, more than 8,000 companies are listed on Indian exchanges.
This is a huge number, and the stock market’s rising performance since 2004 has resulted in substantial wealth creation for families with majority stakes in listed companies.
However, among non-listed family companies there has been a traditional reluctance to share ownership and surrender control. This may be changing. In recent times, there are signs that PE firms are willing to play a more active advisory role in parallel with their ability to raise growth capital—a prospect that owners and promoters are starting to find attractive.
As well as providing capital and financial expertise, PE firms are in a unique position to introduce new disciplines and much-needed structural reforms, such as focusing on quality of management teams or introduction of leadership succession plans.
Indian companies are also becoming increasingly aware of the value that PE firms can add. For them, private capital provides the means by which they can get mentoring and advice without having to go to public markets. There is a growing breed of entrepreneurs who are looking for a PE firm that can help not by giving unsolicited advice but by playing the part of a sounding board. These entrepreneurs, in turn, can become powerful advocates for PE as distinct from public money or hedge fund money.
However, an India connection in PE is very important, since many Indian companies understandably want Indian solutions to Indian problems.
Therefore, an investment partner with a team on the ground and expertise and knowledge of the local environment and operational issues will be preferred to a hedge fund flying in from Singapore and spending three days a month in the country.
Many companies appreciate being able to have in-depth discussions with their investment partners about a variety of business decisions such as advertising investment, merchandising or retailing. It is extremely difficult to do this with someone who is only occasionally in the country.
Real value of PE
Companies have different reasons for wanting private capital depending on the type of company and the stage it is at, that is, growing, seeking acquisitions, family-owned, or a large company. In such a scenario, where companies are looking at the difference between PE, the public market and hedge funds as potential sources of investment, the question on everyone’s mind is: Does PE really add value?
Ultimately, the PE business is all about achieving financial returns. Some companies may have aspirations to add value and growth, but that is a means to an end—the goal is to make money.
Puneet Bhatia of TPG Newbridge explains: “For a PE company, there needs to be a strong justification of an investment in a private company which is one-fifth the size of a public company, at a similar valuation, with presumably a similar outcome in terms of return.”
However, as Abhay Havaldar of General Atlantic Llc. says: “At the end of the day, most important is the kind of relationship the PE firm builds with a promoter—ideally developing a partnership in which it can assist with future ventures and opportunities, making it mutually beneficial to work with the successful serial entrepreneur.”
The fact is that in the current environment, Indian investee companies need to learn to play by different rules from what they are used to, accessing global talent pools, capital pools and customers.
PE scores here, since companies are attracted by the fact that they gain not only an investment but a partner who is able and willing to provide continuous advice and support.
Beginning this week, we will carry fortnightly columns from consultancy firm Spencer Stuart on strategy and leadership issues in this space. This article contains 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.
This is the first in a three-part series on private equity in India. The next one will focus on the importance of a clear exit strategy in private equity.
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