While considering the large sums of money private equity (PE) funds made in the Justdial initial public offering (IPO), most forget PE funds such as Sequoia Capital , which stood by promoter V S S Mani during his previous unsuccessful attempts to list the company. The Justdial case shows how sticking with an Indian entrepreneur turned out to be beneficial for a fund.
"On an approximate basis, the IPO valuation was just over 10 times our initial entry valuation (in rupees) in June 2009, though there were Esop (employee stock ownership plan) grants and dilution due to our own pre-IPO round along the way," said Shailendra Singh, managing director, Sequoia Capital.
Many PE companies, however, don't play a long-term game. And, short-term, unrealistic expectations could lead to sour relationships and charges of corporate governance failures.
"PE funds have got used to how India works," said Sanjay Vakharia, promoter of Spykar, a large denim brand, the majority owner of which is Avigo Capital. "Now, expectations are reasonable. There is a much more understanding atmosphere now."
Avigo is winding up its fund in India and Vakharia is meeting other PE funds to seek a replacement investor and facilitate the exit. Avigo had stood alongside Spykar through tough times for the apparel sector, Vakharia said, adding, "We launched two brands and just when we did, the Lehman downturn happened. Also, the September 2008 attack took place in Mumbai. It took us two to three years to get back…Avigo advised us on how to get out of the crises." He says his company is now cash-positive and would soon record a net profit.
PE circles are cagey about charges of fraud made in the past. A spokesperson for Bain Capital, which ran into problems with kidswear chain Lilliput, declined comment, citing client confidentiality.
Experts point to a mismatch between what PE funds expect and what promoters aim for. Also, a PE fund and a first-time entrepreneur may have completely different styles of functioning.
"First-generation entrepreneurs are used to an informal way of working. For PE funds, the more formal a structure, the more comfortable you are," said Rahul Mehta, president of the Clothing Manufacturers Association of India. "For me, as an entrepreneur, the smile on a customer's face is more important than whether the salesman has filled up the report form."
Some sectors more prone
Those advising PE firms say sectors in which government interface is high are more prone to charges of corporate governance failures. "In infrastructure, real estate, e-commerce and online retail, growth is fast and corporate governance is evolving," said Vidya Rajarao, who heads forensic services at PricewaterhouseCoopers (PwC) India and, for 15 years, has helped companies probe allegations of fraud, bribery and corruption.
Also prone to such scenarios are sectors in which economic assumptions or policies have completely changed.
"If the assumptions you made about a business change, a blame game begins. For instance, in telecom, from 2006-2007, the policy environment changed," said Ashvin Parekh, partner and national leader (global financial services), Ernst & Young.
"In India, economic cycles are too many and occur too often.
You make a certain bet and conditions change; it is difficult for a human being to admit he made a mistake."
Though PE firms take risks in the West as well, business environments there are much more regulated and the regulatory mechanism is strong. Asia, however, is a different ball game.
"Being seen as a success is critical, as global investors have become more selective about which firms to back; at the same time, they're allocating more money to Asia. The Asia-Pacific region's share of global PE fundraising almost doubled to 15 per cent last year, compared to a decade ago, totalling $43.9 billion, according to Zug, Switzerland-based Capital Dynamics AG," said a Bloomberg report dated May 9.
Homework
One way to avoid souring ties is persistent homework and due diligence of the sector and the company. PwC's Rajarao says PE funds get board seats, but fail to ask probing questions. And, without asking these questions, it is tough to spot cash being leaked out. "The questions being asked at the time of an exit should have been asked at the time of the entry," he says.
"Governance is a soft spot; anything else needs evidence," said Parekh.
One of the first domestic PE funds operational in India says it mostly acquires majority stakes in companies it invests in. It adds this is because the management is professional. Just like Rajarao, it emphasises homework.
"When we are examining a promoter, we talk to his ex-employees, his suppliers, his bankers and his auditors to try and figure how his dealings have been. How has the person behaved in a stress situation? If you have a good network to assess and reach people, it really helps," said Vishal Nevatia, managing partner of the $1.3-billion India Value Fund, in which 95 per cent of the investment is from 30 foreign institutions, including pension funds, endowments, sovereign funds and fund of funds. India Value Fund owns majority stake in Radio City, Meru Cabs and Manipal Hospitals.
"On an approximate basis, the IPO valuation was just over 10 times our initial entry valuation (in rupees) in June 2009, though there were Esop (employee stock ownership plan) grants and dilution due to our own pre-IPO round along the way," said Shailendra Singh, managing director, Sequoia Capital.
Many PE companies, however, don't play a long-term game. And, short-term, unrealistic expectations could lead to sour relationships and charges of corporate governance failures.
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Indian entrepreneurs say times have changed, and despite recent murmurs of fault lines in relationships, PE funding in India has come of age.
"PE funds have got used to how India works," said Sanjay Vakharia, promoter of Spykar, a large denim brand, the majority owner of which is Avigo Capital. "Now, expectations are reasonable. There is a much more understanding atmosphere now."
Avigo is winding up its fund in India and Vakharia is meeting other PE funds to seek a replacement investor and facilitate the exit. Avigo had stood alongside Spykar through tough times for the apparel sector, Vakharia said, adding, "We launched two brands and just when we did, the Lehman downturn happened. Also, the September 2008 attack took place in Mumbai. It took us two to three years to get back…Avigo advised us on how to get out of the crises." He says his company is now cash-positive and would soon record a net profit.
PE circles are cagey about charges of fraud made in the past. A spokesperson for Bain Capital, which ran into problems with kidswear chain Lilliput, declined comment, citing client confidentiality.
Experts point to a mismatch between what PE funds expect and what promoters aim for. Also, a PE fund and a first-time entrepreneur may have completely different styles of functioning.
"First-generation entrepreneurs are used to an informal way of working. For PE funds, the more formal a structure, the more comfortable you are," said Rahul Mehta, president of the Clothing Manufacturers Association of India. "For me, as an entrepreneur, the smile on a customer's face is more important than whether the salesman has filled up the report form."
Some sectors more prone
Those advising PE firms say sectors in which government interface is high are more prone to charges of corporate governance failures. "In infrastructure, real estate, e-commerce and online retail, growth is fast and corporate governance is evolving," said Vidya Rajarao, who heads forensic services at PricewaterhouseCoopers (PwC) India and, for 15 years, has helped companies probe allegations of fraud, bribery and corruption.
Also prone to such scenarios are sectors in which economic assumptions or policies have completely changed.
"If the assumptions you made about a business change, a blame game begins. For instance, in telecom, from 2006-2007, the policy environment changed," said Ashvin Parekh, partner and national leader (global financial services), Ernst & Young.
"In India, economic cycles are too many and occur too often.
You make a certain bet and conditions change; it is difficult for a human being to admit he made a mistake."
Though PE firms take risks in the West as well, business environments there are much more regulated and the regulatory mechanism is strong. Asia, however, is a different ball game.
"Being seen as a success is critical, as global investors have become more selective about which firms to back; at the same time, they're allocating more money to Asia. The Asia-Pacific region's share of global PE fundraising almost doubled to 15 per cent last year, compared to a decade ago, totalling $43.9 billion, according to Zug, Switzerland-based Capital Dynamics AG," said a Bloomberg report dated May 9.
Homework
One way to avoid souring ties is persistent homework and due diligence of the sector and the company. PwC's Rajarao says PE funds get board seats, but fail to ask probing questions. And, without asking these questions, it is tough to spot cash being leaked out. "The questions being asked at the time of an exit should have been asked at the time of the entry," he says.
"Governance is a soft spot; anything else needs evidence," said Parekh.
One of the first domestic PE funds operational in India says it mostly acquires majority stakes in companies it invests in. It adds this is because the management is professional. Just like Rajarao, it emphasises homework.
"When we are examining a promoter, we talk to his ex-employees, his suppliers, his bankers and his auditors to try and figure how his dealings have been. How has the person behaved in a stress situation? If you have a good network to assess and reach people, it really helps," said Vishal Nevatia, managing partner of the $1.3-billion India Value Fund, in which 95 per cent of the investment is from 30 foreign institutions, including pension funds, endowments, sovereign funds and fund of funds. India Value Fund owns majority stake in Radio City, Meru Cabs and Manipal Hospitals.