Bangalore: A race to get the first look at investment opportunities before someone else snaps them up is forcing venture capital and midsize private equity (PE) investors to explore alternatives to the investment banking route.
Venture capital and PE investors have started seeking out exclusive relationships with chartered accountant (CA) networks, which act as auditors and advisers to these companies, and are gaining importance as deal sources in tier II and tier III cities.
Zephyr Peacock India Fund, focused on small and medium enterprises, has built up such ties with CA networks in Rajasthan and Madhya Pradesh, which aren’t necessarily the natural province of investment bankers. Investors are also able to avoid competition because CAs who advise the promoters don’t shop around deals to various PE players.
“They are more relationship-driven,” said Mukul Gulati, Zephyr’s managing director. “We are able to find more non-auction deals from these sources.”
In the investment business, access to deals is critical. With venture capitalists and PE firms mostly confined to the big cities, most investment banking activity is also located in and around those areas.
With tier II and tier III cities emerging as a market, investors are looking at ways of making inroads into these far-flung areas. Which is where the local CAs are coming in handy.
“These relations certainly bring a competitive edge to investors,” said Sarath Naru, managing partner at Ventureast Fund Advisors, an early-stage venture capital fund. CA networks take a lot of work off an investor’s hands by having comprehensive information on the financials of a company and the background of the promoter, making the initial diligence easier, thus speeding up the process.
Such deals through CA networks are in the Rs20-30 crore range as most of the firms handled by them have a revenue of Rs80-100 crore.
“The size of the deals from I-bankers is bigger as the economics are more interesting in big deals,” said Mohanjit Jolly, executive director at Draper Fisher Jurvetson India, which is working with about half a dozen networks. “CAs, on the other hand, bring small to mid-sized deals.”
For CAs who have started dabbling as local intermediaries, equity funding is a way of meeting client demand. Coimbatore-based CA network head P.S. Sitaram, who has a team of eight people, was well versed in the process of raising debt funding from banks.
When three firms?that he was working with raised the possibility of equity funding, he was able to help conclude investment deals on all of them.
“Our business is not necessarily about audit,” Sitaram said. “We take care of funding needs of a company and we try to do what is best for the promoter.”
Clearly, these emerging intermediaries help uncover deals and entrepreneurs that investors otherwise would not encounter, while maintaining an investor-friendly environment. On the other hand, investors may sometimes not get all the information that they’re looking for.
“In intermediary-controlled deals it can sometimes be difficult for us to get to know management as well as we would like to,” said Bejul Somaia, managing director of Lightspeed Advisory Services India Pvt. Ltd, which is working closely with a couple of CA networks.
Also, the transactions may not be packaged as well as investment-banker intermediated deals because CAs won’t be well versed with the details involved, such as term sheets and valuations.
“We want an intermediary who can add value to the deals brought to us, not a one-person team,” said Rajesh Srivastava, chief executive of Rabo Equity Advisors Pvt. Ltd.
Investment bankers don’t see the CA networks as a threat, but as potential partners.
“They are a first point of contact. I-banking is a specialized service and can’t be done by everyone,” said C. Venkat Subramanyam, founder and director of Veda Corporate Advisors Pvt. Ltd, a Chennai-based investment bank. “We would like to collaborate with these networks.”
Deal sources are set to get increasingly varied in India.
IDG Ventures India, for example, is even seeing referrals from recruitment agencies. “We invest in early-stage companies and help them in recruiting senior management,” said Ranjith Menon, senior investment adviser. “There are a few recruitment firms that we have been working closely for years. They work with other firms as well. In case those companies are looking for capital, these recruitment agencies put them across to us.”