Last Thursday, I found myself at a different kind of private equity (PE) event—a one-day, closed-door CFO conference organized by IDFC Private Equity for its 17 portfolio companies. I actually had to pitch quite hard to get invited because the sessions were formatted as no-holds- barred brainstorming—which means sensitive to press. Luis Miranda, president and CEO, IDFC PE, finally relented when the following argument was put forward: PE firms emphasize their role as value-added investors as opposed to other financial investors who bring just money to the table. What better way to see how strong that claim holds than to sit in on a free and frank discussion on what CFOs of PE-invested companies have gained or not from having a PE investor on board.
I was particularly curious because quite a few corporate honchos at PE-backed firms, as different from venture capital-backed firms, have often told me that PE investors don’t really get involved with investee companies beyond board-level strategic decisions, usually related to aspects of corporate governance. “For instance, all PE firms will say that their investee companies can leverage their network of global portfolio companies to access new markets and so on. That almost never translates into practice,” said the CEO of a Mumbai-based BPO firm recently. It wouldn’t be fair to entirely endorse that view because I do know of PE firms that have got in knee-deep to help their portfolio companies through rough patches.
The Thursday conference, where I heard some very candid views from CFOs, a tribe that generally keeps a low-profile, threw up a few anecdotal learnings on the relationship between PE firms and their investees. Most of this is probably common knowledge, but it doesn’t hurt to reiterate a few things:
a) About 60% of investments by PE firms are in small and medium enterprises (SMEs). By definition, this implies family-managed businesses that are trying to professionalize. Such companies often depend on PE investors to bring in professional managers and they are able to bring in such managers on the basis of the PE firm’s credentials.
b) In a run-up to an IPO, the PE firm often undertakes or oversees the functions of an investment banker. As somebody from a portfolio company that went public last year quipped, “The senior investment banking team only shows up to clinch the mandate. For the rest of their process, they depute their management trainees.”
c) In a family-run business, where most strategic decisions rest with the promoter-CEO, the absence of a strong second line can sometimes slow down decision-making. PE firms, such as Warburg Pincus, Actis Capital and IDFC PE, of course, have been known to step into that role more often than not.
Of course, not all is hunky dory. Luis, for instance, was not on talking terms with one of the CEOs of his portfolio companies for a few months because of differences of opinion. They laugh about it now, but not all such situations end as happily. What did come out strong from the conference was that despite the ups and downs, companies now accept PE firms as business partners and that is perhaps where PE does score over other financial investors.
Snigdha Sengupta is Mint’s resident expert on private equity and venture capital.
Comments are welcome at firstname.lastname@example.org