3 min read.Updated: 30 Jul 2019, 11:38 PM ISTRenuka Ramnath
Investor should operate with an entrepreneurial mindset and not behave like a financial analyst
Private equity (PE) has been playing a crucial role by backing Indian entrepreneurs with long-term risk capital to help build great businesses. The industry has done a commendable job of investing in 4,000-odd Indian companies in the last 15 years, putting to work more than $200 billion. In the process, several marquee businesses, such as Airtel, PVR Cinemas, Havells, AU Finance, and RBL Bank have been built, while many new-age ideas, including Flipkart, Byju’s, Ola, Swiggy, Paytm, and Dream 11, were brought to life.
PE firms are fiduciary fund managers. They raise money in pooled vehicles from large global institutions. These institutions require that the PE fund embraces international best practices in doing their business and that their portfolio companies follow the highest standards of corporate governance.
Now, let us examine what goes on inside a PE shop. In an investment evaluation, the investor analyses the future possibilities the market may provide, and the capability of the company to appropriate this opportunity to build a highly valuable company. This is the most exciting and the most difficult part of investing. Several risks play out, which are difficult to predict at the time of making the investment decision. In addition, the market, competition and regulation may push the company to pivot to a completely different business model. In this highly dynamic environment, the investor needs to work hand in hand with the entrepreneur, and guide him, besides laying out certain conditions on what risks are worthy of being contracted. This role, by no means, is a cookie cutter. It demands huge ability to influence competent entrepreneurs. Encouraging entrepreneurial drive and, at the same time, exercising discipline and caution, could ensure that the full potential of the business is not hampered.
It is only possible to exercise such influence if there is chemistry between the entrepreneur and the PE fund, one that is built on the platform of trust. Theoretically, getting the macros right should augur well for a good investment. However, in reality, it is the choice of entrepreneur that makes all the difference. At Multiples, we spend as much time thinking through the DNA of the entrepreneur as we do on the attractiveness of the macros and the business.
In a typical investment duration of four to five years, the business could go through both up and down cycles. It is how you conduct yourself in a down cycle with the entrepreneur that pretty much makes your reputation as a PE investor. We have encouraged entrepreneurs to use the down cycles to put their house in order, in terms of changes in strategy, people, execution engine, so that when the macros come back they are able to grow disproportionately. This calls for the PE investor to operate with an entrepreneurial mindset and not just behave like a financial analyst.
As a practitioner, it is quite gratifying for me to see that PE in India has evolved from a sub-billion dollar industry in the early 2000s to a highly mature industry putting to work more than $25 billion of long-term capital each year. In fact, overtime, PE has become the primary source of risk capital for building businesses.
In the last five years alone, PEs brought in three times more money than what was raised through initial public offerings, underscoring the critical role that PEs are playing in fuelling Indian entrepreneurship and job creation. For me, the adrenalin rush in this business comes from bringing long-term institutional capital to highly deserving Indian entrepreneurs, who go on to build long-lasting businesses and creating a virtuous cycle of wealth creation and prosperity.