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Home Magazine February 2013 Who Will Win the Private Equity Game?

Who Will Win the Private Equity Game?

Difficulty to exit has foiled the end-game strategies of PEs. As time stretches lines of worry grow. Will equity investment continue to flow despite fewer exits? SMEntrepreneur explores.

BY Punita Sabharwal | COMMENTS ( 2 ) |

Difficulty to exit has foiled the end-game strategies of PEs. As time stretches lines of worry grow. Will equity investment continue to flow despite fewer exits? SMEntrepreneur explores.


With exits hard to execute and the absence of IPOs, equity investments in growth phase seems to have dried up. If a recent report by Ernst & Young is to be believed, investments by private equity players in the country slumped 21 per cent to $7.6 billion in 2012. Last year, PE/VC investments touched $7.6 billion spread across 415 deals, which is much lower than in 2011. The report said that PE activity in 2013 would be similar to that of 2012. If experts are to be believed consolidation in PE industry has already begun, and it will be the year of transition.


According to Dhanpal Jhaveri, Partner and CEO, Everstone Capital, “PE is a long-term investment with a lock-in period of five-seven years. IPO will depend on what maturity stage the business is in.”


Adding why IPO is a long chase, Mark Silgardo, Senior Managing Partner, IL&FS PE, says, “PE is a long-term investment. Companies rush to cash in public market. They do issue at a higher price. But if you are not delivering 15-20 per cent regularly, it is the beginning of an end. You are involved in the dynamics of the market.”


On the number of investments made, Sanjiv Kaul, Managing Director, ChrysCapital, says, “We have made 65 investments in India and have made 40 exits so far.”


But what goes inside the whole PE operations? How realistic have we been in seeing those high valuations and exit prospects. “The era of throwing away PE money at entrepreneurs is over. If there are no exits, comparisons are drawn. Valuations were so high in 2007, 2008, 2009 and 2010 but where are the exits? It was all fancy. The last year came with the sense of realism. Investors are now far more demanding,” adds Kaul.


Travel portal YatraOnline has raised $45 million from Intel Capital, Norwest and Valiant Capital. Yatra has raised four rounds of investments so far. Dhruv Shringi, Co-Founder and CEO, Yatra, says, “You need to be prepared for a seven-ten year horizon because things in India especially on the e-commerce side take time. The government is yet to roll out national optical fibre network; and that will only happen by 2014.”


“Getting broadband, getting traction has taken time. These sort of physical constraints are there in a country like India. So from investor horizon, my only request to investors is to take a look at a larger horizon of seven-ten years. If exits happen earlier, it will be a bonus,” he adds.


There has been only one exit in the e-commerce space, which is MakeMyTrip. Investors were attracted to the dream of IPOs. But it leaves a bad taste if both the investor and entrepreneur are not clear about the expectations from each other leaving the growth of the enterprises hanging. On spending more time in being patient with the investment, Kaul says, “PE and the enterprises are on the same page as long as there is clarity. We can plan the exit. Whether it becomes a conflict or runs smoothly. If the focus is on business, there is no conflict. Smart entrepreneurs have clarity of vision. They do course correction if required.”


On what he expects from an investor, Dr Mahipal S Sachdev, Chairman and Medical Director, Centre for Sight, says, “I look for an investor who can take me to the next level, who can help me get listing done. I want an investor to show me the bigger canvas.”


Kunwer Sachdev, Founder and MD, Su-Kam, while sharing his experience with PE, recalls, “Our revenue was Rs 180 crore when I took PE. They did not advise me how to take my business to the next level. They were interested in how to double their money. They were silent even when we were not growing. I wanted more interference from them. But they were too passive. Next time, I will look at the reputation of investors and check their past experiences, thus enquiring more about them.”


However, for Yatra’s Shringi, the scalability in the business was much more than he anticipated, thanks to the learning and experience he got from the investors on board. He says, “When we were initially putting it all together, we planned a certain rate of growth and scaling. The investors put a number out there, which was five times the scale that we were talking about. They said let us work backwards from there and see what it takes to achieve that scale. Had we not got that insight, we would still be working on those gradual numbers, growing slowly. They came and brought scale.”


On his experience of working with entrepreneurs, Jhaveri says, “We support quality entrepreneurs, and most of them are first generation entrepreneurs who run Rs 300-crore enterprises and want to convert them into Rs 1,000-crore firms.”


On having rational expectations from PE, Silgardo says, “When to get involved, when to stay away from the business is a tough call. The line is very thin. We invest in companies because we believe they can grow faster. If the relationship goes well, the entrepreneur will help you make an exit.”


What an investor brings in

Entrepreneurs always seek the value addition to his/her business. Jhaveri says, “Value add is a much-used and much-abused word. You need to see what other things the investor will bring to the table in addition to valuation. How do you get the functional expertise and experience of PE rightly used in the business? How can you strengthen this and step into their repository of knowledge?”


On what investors bring to the table, Shringi shares, “Investors bring a lot of learning. We received investment from Promod Haque of Norwest Venture Partners. They have the experience of investing in companies that were facing the challenges similar to ours. So the guidance to show how to scale and handle challenges has been very useful. Thus, experienced investor can guide you to sail through a difficult period.”


What they see before going forward with a deal, Kaul says, “We try to know the entrepreneur before we invest. We cannot go ahead in a relationship where there are negative surprises. Before the deal, he will put on the best behaviour. It is not about cost today, it is about value tomorrow. We spend a lot of time in identifying the future partner.”


“PE Funds do a lot of research in identifying which sector to invest in and what is the niche? Entrepreneurs should look at investors as their financial partners. The investment period might be of five-seven years, but both parties should have the clarity of expectations. We walk away from the entrepreneur if there is no chemistry. Fifty per cent is risk taking and 50 per cent is value added,” he adds further.


In 2006, ChrysCapital invested in Intas Pharma. At the same time, it also invested in company X. Both had similar strategies. Intas had the market cap of Rs 500 crore at the time of investment. ChrysCapital asked them to focus much more on services. In the long run, Intas was doing Rs 3,500 crore business, while company X was still at Rs 1,600-crore mark. Change in strategy is one of those areas that can change the growth curve.


“PE in India is still at a nascent stage. Because of entrepreneurs’ problems PE money goes down the drain. Entrepreneurs should look at the value addition by PE not just the money they bring in. But not many entrepreneurs pay weightage to that. PE is smart capital so utilise it well,” elaborates Kaul.


Till now, the growth has been better than what had been anticipated. The last six months have been challenging for the travel industry ever since Kingfisher shut operations. On asking when the exit will happen, Shringi says, “Our thought process is to look at some sort of public market exit. But the timing right now is not appropriate for some sort of public market exit. So we will continue to focus on growing the business and that is not something we can control. We cannot control the timing of an exit but we can control quality of the business and services that we provide and we will continue to grow.”


After Jubilant FoodWorks Ltd in 2010, and Speciality Restaurants in 2012, the restaurant industry has not seen any other exit. PE money works right in partnership from both ends where the entrepreneur and the investor look at what is in the larger interest of the business making the business grow. The need of the hour is long-term investors who can understand Indian market’s nuances and work in tandem with entrepreneurs.


However as time stretches, the lines of worry will grow -- who will win the private equity game?

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Please add your comment


April 02, 2013 at 6:51 pm

Very true! Makes a change to see semoone spell it out like that. :)

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April 02, 2013 at 11:29 am

A provocative insight! Just what we need!

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