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Private Equity investors and their role in Stock Market

It’s more than just the money. For many emerging companies, Private Equity investors provide invaluable advice and the right perspective, when it matters most


ARBURG PINCUS’ dalliance with Bharti Tele-Ventures from 1999 to 2005 is still remembered as one of corporate India’s most famous relationships. When it ended, the international private equity giant walked away with a cool 450% return on its investment. Bharti, too, has grown since then in leaps and bounds to become India’s largest mobile network service provider. However, the saga continues to live on and many consider the deal to be India’s first truly fruitful partnership between a corporation and a private investor. Not because of the sheer volume of money the former injected into the latter back then, but also because Warburg set a new precedent in taking a company with great potential and hand-holding it all the way to success.


This deal and others like it (such as Pantaloons’ transformation assisted by ICICI Venture) helped many PE firms and financial institutions understand one simple fact; that the Indian market was not starved of funds or entrepreneurial spirit. India has and continues to produce lakhs of great entrepreneurs with amazing ideas. But they face two challenges—getting organised and attaining operational efficiency. That’s when private institutions stepped in to fill in. Capital was never a constraint here; The real need was to take a traditionally-run, unorganised business and provide professional and institutional support.


While emerging companies make a good investment proposition, financial institutions find that they sometimes lack global perspective. That is why global firms like Lehman Brothers, Apax Partners, Soros Fund Management and Baird Private Equity, apart from several others, are now taking interest in India. Many financial institutions that associate themselves with emerging companies say that more often than not, small and medium firms have good business models but lack professionalism. It’s just the lack of exposure in family-run businesses that is a barrier. Most of them are actually ready to change for the sake of growth


Take the case of DRS Logistics. Kotak Private Equity, an arm of Kotak Mahindra Bank, invested Rs 100 crore into the firm in March 2007. The Agarwal family that owns DRS Logistics was already running it but large-scale changes were necessary if the company was to become competitive differentiate itself in the highly fragmented road transport services segment. It took us seven months to get their systems and processes organised. The accounting practices followed were old and inaccurate and several statutory compliance issues had to be taken care of. There was no formal reporting hierarchy either. We had to be careful with every move. Investing in a family-owned business is tricky as personal equations come into play and you cannot afford to antagonise anybody.


Kotak helped DRS hire a new chief financial officer and other senior level functionaries. Since the books of accounts had to be practically rewritten, Deshmukh knew that plonking them in front of a ‘Big Four’ accounting firm would be of no use. Kotak brought in a smaller agency to help DRS prepare for the audit. The PE firm also went ahead and got a family business consultant to speak with the Agarwals to ensure that everyone understood their roles perfectly and there were no internal conflicts. Even the mission statement was redone. Today, the company looks completely different from what it used to be and there is an IPO happening some time in the near future.


Banks too provide financial assistance to smaller companies. Sometimes, founders of emerging companies require a professional perspective on foreign exchange or other financial problems. We do not interfere in their operations, but try to be helpful wherever necessary by bringing in expert opinions and conducting seminars for them. The company has evolved from a family-run business to a professionally run one and the credit goes to the financial institutions associated with us. The challenge is to make SME entrepreneurs understand why certain hard choices have to be made. In such cases, using financial clout where needed may be the only way out.



Thomas of IVF Advisors believes that there are three issues that financial institutions need to learn when dealing with traditionally-run firms.



The first, he says, is that many Indian entrepreneurs typically consider capital expenditure a necessary evil.



The second is that the accounting methods followed are inefficient because the value of transparency of accounts isn’t immediately evident to the businessman.



Thirdly, he says that such companies hesitate to pay managerial compensation on par with the rest of the industry. Shared control is a scary thought for a small entrepreneur. But if you don’t pay talent the rate that it would get elsewhere, you’ll always struggle to grow.



Today, the Meru radio taxis are well known among commuters in the metros. But the company started very small, and in a different segment. In 2000, Neeraj Gupta, currently managing director of the Rs 40-crore V-Link Travel Solutions (then called Travel Link) was running a fleet service for call centres. But after IVF Advisors came into the picture, the company was radically transformed. V-Link was solely into fleet management back then. But we felt that the cab business was getting lucrative as well—and that’s how VLink diversified into the Meru radio cab service. Neeraj was really enthusiastic about the idea too. The good part about working with him is that we get on really well. Neeraj is someone who really has his ear to the ground and is full of enthusiasm. So our interventions didn’t meet with much dissonance.



From a founder’s point of view, watching your business being taken care of by a surrogate parent (read PE firm) is never easy. Resistance to change isn’t uncommon and PE firms have to indulge in a fair amount of fire fighting and going beyond the call of duty. Luis Miranda, CEO of IDFC Private Equity, a firm which has, among its investees, companies like GMR Infrastructure, Gujarat Pipavav Port, Sical Logistics and Manipal Health Systems, explains, You have to spend time getting comfortable with the founders and the management team. During the initial honeymoon period, everyone’s sweet to each other, but what really counts is getting it right after that period is over. This usually occurs when the promoters believe in divulging only whatever is really necessary because they don’t truly feel that the PE firm is adding value to the company. Miranda says, You have to strike a balance. If the founder knows something better than you, let him take the decisions. If not, you have to convince him you’re acting in the company’s best interests.



When IDFC PE invested in Manipal Universal Learning, they were aware that the company had 50 years’ worth of experience in the education business, and therefore, concentrated on getting a good leadership team in place. IDFC helped them identify a CEO, an ex-IT professional from our own network of contacts. Similarly, there have been times when Miranda has had to get rid of people or stop the right people from quitting his investee organisations.



PE firms in the resurgent India of today have got a new role to play. They provide order in a chaotic world. But it is a role they aren’t averse to playing. They know that in a vast land teeming with great ideas and a huge consumer market, great entrepreneurs are waiting around every corner. All they need is a helping hand to add some polish to their dreams.

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