Mumbai: Private equity (PE) is gaining greater acceptance in India, where rising borrowing costs and a tanking stock market have shut down other means of funding, forcing family-owned businesses to tap a source they had once shunned.
“It’s a question of survival now,” said Vishal Sharma, chief executive of Tuscan Ventures, a PE firm focused on logistics, which has closed three deals in the past year.
“The tough times are forcing firms to evaluate their business plans and look for help to ride out the storm,” Sharma said.
PE investing in India and China held steady in the first half of the year, the Asia Venture Capital Journal said, with India seeing a 3.2% rise to $6.8 billion (Rs29,512 crore today), and China registering a 3% gain to $5.8 billion.
Indian PE deals typically involve little leverage, and PE firms have often done growth capital deals and late-stage investments, buying small stakes in private and listed companies.
Still, PE firms have had a tough time convincing family-owned businesses to surrender some control in return for cash.
With easy initial public offerings a thing of the past, firms are coming around.
“When the markets recover, firms will choose to tap the market again, but they may now also go to PE, as they are recognizing the value add that PE brings,” said Arun Natarajan, chief executive of research firm Venture Intelligence.
Family-owned firms tend to be sprawling entities with diversified interests and lacking clear succession plans, which makes smaller firms particularly vulnerable at this time.
“Even speaking to a private equity firm was unheard of a couple of years ago for a family-owned business,” Natarajan said. “They see the merit now in selling non-core assets, or a stake to PE. It is seen as a better option to selling out to a rival.”
Tuscan’s Sharma said that companies in India were also realizing they want the expertise that PE brings along: “They want more than just a cheque. They now want smart money.”