SMEs gain PE traction, raising equity necessary before IPO
After riding a wave of growth in the last ten years, SMEs are now in the next phase of scaling up. More and more PE players are now betting on SMEs and platforms like SME Exchange will make things easier for investors to invest or exit in the future, according to PE/VC players, entrepreneurs and investment bankers present at the recent VCCircle Emerging Enterprises Investment Summit said.
“Large PE players are coming to mid market for investment now. The reason being that the mid market is big, but investment players are few. The investors who used to do deals worth $20- $30 million are now moving to the $15 million bracket -- this is the shift,” said S Harikrishnan, managing direftcor, Avigo Capital Partners. He said even the investors who were in $15 million bracket are now going into the sub $8 million bracket.
Mohit Ralhan, managing partner, Indus Balaji, said there are significant areas in the mid market that have boosted wealth creation in the last ten years. “Areas like Knowledge services (IT-ITES), money transfer economies (like Gujrat) and agriculture-related commodities firms have gained quite significant PE traction,” he said.
However, there are few areas in SMEs like manufacturing which haven’t gained much traction. Harikrishnan from Avigo noted that while IT-ITEs attracts 30-35 per cent of the annual PE investments , manufacturing accounted for only 12 per cent. The reason being that the manufacturing industry’s market size is not clear and even the balance sheets of these companies are not crystal clear.
The IPO route for SMEs, significance of SME exchange platform
Even entrepreneurs, apart from investors, feel that it is important for a company to be sheltered by a PE investor before going for an IPO. “As an entrepreneur, I want to understand what will be the set of problems I will face once I file for an IPO. That is why I am looking for a new set of investors who can guide me, who can tell me where is the bigger canvas. Also, you need a scale before an IPO, that investors help you achieve,” said Chairman, Medical Director & Senior Consultant Ophthalmology, Centre for Sight, Dr Mahipal S Sachdev,said.
“Rather than focusing on quarter to quarter results, SMEs should be focusing on the growth path and hence it is important for them to have an investor on board,” feels Dhanpal Jhaveri, Partner & CEO, Everstone Capital. Also while PE money can be used for M&As, debt can’t be used.
There are platforms like SME Exchange, which, in the coming future, will be needed both by investors and entrepreneurs. National Stiock Exchange (NSE) launched the SME platform in September 2012 and already four companies have approached it, out of which two companies have raised Rs 25 crores each.
Ravi Tyagi, Head SME, National Stock Exchange of India shares, “We are like a public venture market. We have created a market of SMEs where PE/VCs invest. The need for capital in the SME market is huge. We understand that even if PE/VCs want to invest in such companies, they will need partnerships and we help them.” He added that the SME platform could put together all the money coming in from early-stage investors which could compliment VC investment in the country.
“We have also tied up with a lot of angel investors like IAN and Mumbai Angels. We could also help some VCs to exit companies in the future,” said Tyagi.
(Edited by Prem Udayabhanu)
In a welcome move, the Ministry of Corporate Affairs on 19 July 2016 issued a notification amending the Compan