PE Funding on the rise in India

PE investors looking for great returns within a short time frame are having a hay day in a rebounding economic scenario. News papers are flooded with reports of a little known PE fund investing in even lesser known companies. Jagannadham Thunuguntla, Equity Head, SMC Capitals Ltd spoke to Taslima Khan on prospects of PE funding for the current fiscal.

Taslima Khan(TK): What is the average ticket size of PE investment?

Jagannathan: The average ticket size of PE investment in India over last 3 years is to the tune of about US$ 20 mn (that is, about Rs. 90-100 Crores). As the robustness in the market is getting better, one can expect that the average ticket size to go up.

(TK):What will be the level of growth in PE funding activity in the country by next year?

Jagannathan:The activity has been quite active in 2010, as the overall mood in the market is quite good. However, the valuation differences between the investors and the company promoters is the major hurdle for the deals to conclude.

If the market robustness remains, probably, one can expect PE deal activity of about US$ 15-20Bn during next year.

(TK):What are the factors PE investors look for in a company before taking the decision to invest in the company?

Jagannathan: The business model, the profit margins, the client base, the promoters and their vision are the major points that PE investors look for in a company. Scalability of the business model is another major reason for the PE investors to invest in a company.

(TK):What are the check points an entrepreneur should observe while choosing a PE investor?

Jagannathan: Most of the times, the entrepreneurs have to choose that PE investor, who is ready to put money in his company. In the initial stages, the entrepreneurs may not have the luxury of selection of the PE investors.

However, if a company has the choice of choosing the PE investor, then they can choose that investor who has understanding of the industry, who has the international perspective and somebody seasoned who has made investments in that respective industry.

Many of the times, few promoters get overenthusiastic with the credentials of their own companies and keep rejecting the offers of the PE investors, in the anticipation of better valuation from some other investor. In such cases, they will miss out all the potential opportunities and regret later.

(TK):What determines the size of PE investment in a company?

Jagannathan:   The fund deployment plan of the company and the valuation of the company decide the size of PE investment. This also depends on the preparedness of the PE investor how much he is ready to investor, because few PE investors invest not more than US$ 5 million (that is, Rs. 20-25 Crores) per company.

(TK):How does PE funding score over other funding options for an entrepreneur?

Jagannathan: PE funding scores over several other funding options for an entrepreneur in several ways. In case of bank loans, there is a responsibility of payment of interest and repayment of principal on a timely basis. If the company can’t repay at the intervals defined, then it leads the company to NPA (Non-Performing Asset), causing lose of reputation and credibility.

In case of PE funding, besides money, the PE investor also provides ideas and advices to the company. Also, there is no risk of periodic payments of interest and principal. In case of PE funding, the fund will exit the company by selling at the time of IPO. Further, if a company receives PE funding, its stature and reputation go up in the business circles.

(TK):How much of stake control do PE companies aspire in a company? How much of stake should an entrepreneur be willing to give up to a PE investor?

Jagannathan:That depends on the valuation of the company. But, the history suggests that PE investors generally take about 15-20% stake in the company. Globally, the PE investors have a tendency of taking the majority stake of 50%+ in the companies. However, in India, the promoters are not ready to give the controlling stakes to the PE investors. That’s why, in India, most of the deals happen with PE investors taking 15-20% stake.