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Sep, 16 2009

Private equity funding Buying the best deal

With private equity coming to fore for wellness players it is bloom time for health and beauty start-ups. TFW offers recipes for offloading your stake by raising funds via private equity players.

Lured by the potential offered by the wellness segment in India many private equity (PE) investors are lining up to buy a stake in wellness retail, and pharmaceutical sectors. Entrepreneurs require funding to pull off their venture to the next level of growth and here comes the role of a PE funding company which after witnessing the relevant growth in a start up considers it a good idea to buy certain percentage to incur profits in its growing stage. A private equity investment gives a new dimension to a start up, providing it sum of money to fund its expansion or to buy new machineries.

Even in the time of downturn healthcare has provided good returns to investors. Experts believe, besides education, healthcare is one sector that is poised for growth even in these trying times. With a sustained growth witnessed by the wellness segment, there is a huge interest rising amongst PE players to look towards this sector.

Healthcare and wellness market include various segments such as gyms, health centres, ayurvedic treatment centres, spas, slimming centres, pharmacy retail chains, food supplements and ayurvedic products market, which is estimated to be around Rs 1800 crore. On the other hand the overall healthcare market including hospitals and other health delivery formats is estimated to be of Rs 4000 crore.Whether it is spa, slimming centres, beauty salon or gym they have all witnessed a strategic growth in the recent past. Factors contributing towards this growth are rising awareness amongst consumers about being fit and healthy, growing consumerism leading to more spending towards wellness products and services coupled with changing lifestyle due to which more people are on  lookout for relaxation and soothing services.

PE as investment source

The global meltdown and uncertainty of the financial market have compelled businessmen to look for other resources to fund their expansion. Companies concerned about capitalization of their ventures can look towards PE funding company as a source of capital. Any franchise system that has started small can grow it to the next level by giving minority shareholding to investors to fund their venture.

Access to PE is a means towards gaining double-digit growth in the health and wellness segment. A PE investor not only brings to the table money to fund your expansion, it also provides with the right strategy to grow in a more focused manner with a member of the PE company occupying a seat in your managerial board.

Talking about various forms of PE funding, Ritika Arora, Senior Consultant, Healthcare, Technopak Advisor says, “Private equity transactions can take many forms, ranging from seed or early stage venture capital investments to leveraged acquisitions.” While the specific structures, dynamics and terms of these transactions may differ, there are many steps that a company can take to prepare itself for a successful and efficient private equity transaction.

On the requirements of preparing the concept for PE funding, Arora guides, “With an innovative and robust business model and excellent team, target specific JV groups or individuals or VC groups that are interested in the project.”

“Finally what the bottom line is -  the projected ROI, when will it hit and what are the terms you are offering to the PE or the partner firm,” adds Arora.

Astute planning:

But before you venture out to walk on this less trodden path there are certain questions you need to answer. The foremost is:  Is your company  PE investment ready? Before you take a leap for any PE investment, it is advisable to consult your managerial team and see if the systems and management are ready for it. After all it’s about allowing an outsider to monitor your systems at close quarters and understand the nitty-gritty of the system. Would you allow it? Next would be to find out what criteria the PE investor adopts in funding an enterprise? And then, have your plan ready summarising your business profile, plans and objectives for investor’s preview.

With many companies excited about the word ‘PE investment’ you cannot just jump to the conclusion that yours will be selected, as another important question to be answered to investors is how you would utilize the funds. If used well the funding can take your company to the next level, else you lose the ground.

Guiding prospective PE fund seekers, Sandeep Ahuja, MD, VLCC Health Care Ltd says, “A company should have a clear business plan and a proven business model. Only a sustainable model can prove successful in the long-term. Have a lineage in terms of growth trend in the past and you should be willing to practice transparency in operations.”

Advisory firms prove useful:

PE transaction is a different domain altogether to be understood by professionals. Whether one is a PE investor or an investee company, both can hire advisors to help them in taking right decision about PE funding. Technopak, o3 Capital and Ernst & Young are some of the leading advisors who can help you assist in raising funds or undertaking due diligence to choose the right company to suit your portfolio.

Jean Claude Biguine (JCB) has got Ernst and Young on board to assist them in raising the required PE funding for the brand and to help them prepare the company adequately for the same. In the words of Dharmendra Manwani, CEO, Jean Claude Biguine, “It’s important to have an expert/consultancy who can guide you through various labyrinthine procedures and nuances of PE funding.”

A company needs to be ready for the financial, legal, technical and other verifications sought by a prospective buyer or investor.

And last but not the least:  what benefits will I get by parting with some of the stake in my company? A PE fund can be of use to any growing company. VLCC used both its funds to increase its geographic footprint in India and overseas. Ahuja informs, “Today we have more than doubled our size in number of locations and number of countries we are present in.” At present VLCC is operational in 150 locations in 70 cities in five countries. Another area where it utilised the funds was in its education segment which is VLCC institutes for nutrition and beauty services. At present, it has 45 such institutes out of which around 5,000 students pass out every year. “We are also utilising our funds in expanding our presence in herbal cosmetics business which is VLCC personal care and hair care”, adds Ahuja.

The Mumbai based franchisee of French salon, Jean Claude Biguine (JCB) is in the process of seeking PE funding of around $8-10 million. Talking about it, Manwani informs, “We have a plan to have our footprints across the key markets in India with close to 30-40 Biguine outlets in the next five years. We need the support of PE investors to fulfill this vision to make this a pan India brand with rapid expansion.”

JCB earlier received funding of $2 million from Asit Koticha of ASK Group which is said to be an internal existing stakeholder in the enterprise.

Candid and conspicuous balance sheet helps :

Make sure that your financial statements are transparent, self explanatory and leaving no room for ambiguity. A PE company would look at your business plans, how your management team executes operations and your positioning in the market. It is important to plan ahead the answers of questions that may arise in the course of initial discussion with the PE firm. Another main area is what the PE investor would get by investing in your company. This has to be clearly communicated to the PE firm so that there are no doubts in the communication.

PE firms work on building their portfolio. So they may seek for a fit that fits in their portfolio of existing companies. Handling a large portfolio of brands the PE investor can bring best practices for betterment of your company. Accelerating your system with best practices is one of the major advantages a PE investor brings along. For a growing franchisor a PE investor can bring lot of governance and discipline with strategies proving it of a great vehicle for growth.

P.E. investors bring in quality expertise:

Talking about the benefits, a PE investor brings on table Arora avers, “Besides funding in your venture a PE funding would bring benefits like introduction of professional management, transparent accounting standards, corporate governance and adherence to international quality accreditation. Also, PE players can assist companies in achieving organic and inorganic growth, and also bring about industry consolidation. The investee companies make use of expert advice of the PE players to streamline their financial structure and gain financial credibility among the investor community before going for an IPO if planned.”

Talking about his experience with PE investors, Ahuja says, “Partnering with a PE investor is a strategic alliance, as they have high experience in the same domain as they have invested in other PE investee companies. So it’s a strategic linkage.”

VLCC has got two rounds of funding - one in 2004-2005 by CLSA and another in 2007-08 by Indivision.

Besides investment JCB wants to bank on various other aspects. Manwani says, “Along with new capital, a private equity investor also brings a new perspective to the board of directors and to the strategic path that the company pursues.”

“Companies that are backed by private equity, usually grow much faster than other types of businesses. This is due to the combination of capital and experienced management skills that come from the company's executives and private equity players”, adds Manwani.

Thus, Private Equity is a great way for your company to achieve success, as well provide your business with a stable background for making decisions based on strategy.

Franchising -  an option

The aim of PE funding is to do equity investment in start-up companies to fund them in their expansion. But given the funding, do companies stop expanding via franchise mode? Being a franchisor it will be your duty to inform the franchisees about the management changes. Make sure, you communicate the ownership structure information to the franchisee in a positive frame of mind.

While investing in a franchise company the PE investors would want to know the kind of franchise system you are running. As Arora informs, “The growth pattern of the company has to be judged. So number of COCO (company-owned, company-operated) and franchise operated units has to be defined.”

On his plans of further franchising its operations, Ahuja says, “Funding was to increase our geographic presence in those areas where we have not expanded yet. It was to set our footprint where we were not able to expand earlier. We first want to gain market exposure before granting a franchise. Once we have built in significant market share we will expand via franchising.”

On the other hand, Manwani clarifies that JCB will be expanding on company operated model in India.

Negotiating with PE players

Negotiating with a PE investor is not easy, but if your concept is valuable you can set the ball rolling. On various aspects to be negotiated with PE firms, Arora adds, “Percentage of ownership dilution, board representation, participation and other rights are some of the key issues involved in the negotiation process.”

But it is not easy to convince PE players to invest in a venture. At times, even when everything is going well companies make minute mistakes. Counting them, Arora recalls, “Valuation depending on projected revenues and weak business plan are some of the common mistakes made by companies while seeking PE funding.”

Though it’s said, the overall time of finalising your deal will take approximately 6-8 months but starting from first round of meeting to signing the documents, it can take more than a year.

Wellness industry riding the tides of time:

The health and beauty sector is drawing the interest of a number of investment firms. They are looking to make huge investments in innovative projects in this sector in order to get rich dividends in future. On segments expected to make a mark in wellness, Arora says, “Some of the new targets and focus areas of PE funds would be pharmacy retail chains, health and wellness centres, spas, ayurvedic and herbal skin, slimming and beauty centres which are primarily consumer-oriented sectors.”

Experts say that lower gestation period is one of the main factors attracting PE investors towards these segments.

At a time, when most industrial sectors are reeling under recessionary pressures, the wellness industry in India has successfully managed to buck the trend. On future prospects, Arora guides, “Its unorganised segment — including mostly small and regional players who comprise more than 50 per cent of the wellness market — has continued to maintain a steady growth rate despite the challenging times. Going by the present demand for these services in the country, the prospects for smaller wellness and healthcare firms seem bright for the coming years. Changing lifestyles, encouraging market demographics and rising consumerism are likely to spur the growth of small players in the wellness sector.” The ‘looking-good and staying-healthy’ mantra is fast catching the fancy of most Indians. Moreover, the wellness industry is a self-driven sector, fuelled by demand from within the economy rather than external factors.

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