It is not unusual for a general partner at a private equity firm to be closely involved with a portfolio company’s strategy. But when a mid-market private equity firm, which typically does growth capital investing, teams up with its limited partners to assume control of a portfolio company, it calls for an extraordinary effort.

Therefore, when Avigo Capital roped in its limited partner Metmin Investments (an investment firm owned by Indian-born copper king Lord Raj Bagri, honorary president of LME and chairman of the UK-based Metdist Group) that infused Rs 30 crore for 30 per cent stake in Spykar, for a controlling stake in the fashion apparel company Spykar Lifestyles Pvt Ltd, it did mean something more than mere active involvement in management. While the promoters, led by first-generation entrepreneur Prasad Pabrekar, will continue to have board representation and ownership of 40 per cent in the company, Avigo is now clearly on the saddle.

“We want to stabilise the existing operations and rationalise the costs,” said S Harikrishnan, general partner, Avigo Capital, who is on the board of Spykar and has spent the last weekend at the apparel firm’s office, finalising the company’s marketing strategy for the upcoming festive season. Avigo does not want to waste any more time and wants to resurrect the fortunes of the brand in the world’s second fastest growing economy.

Indeed, the private equity firm has been making such moves slowly and steadily over the last nine months as the warning signals gradually cropped up. For instance, the apparel retailer had been on an expansion drive – opening more stores and adding new brands. But the strategies did not pay off well and the company faced a huge financial burden. As part of its restructuring exercise, the company has already shut down 60 high-cost stores and aims to trim the size of the stores further. “We will now aim for store-level profitability and shut down all unviable locations,” Harikrishnan adds.

That the retail business is capital-intensive and growth comes from opening new outlets and from an increase in same-store sales, are well-known facts. And just to be sure that the company is on the right track, the PE firm is now the authorised joint signatory for all cheques exceeding a particular size.

There have been some positive signs of revival even in the initial phase of the turnaround. According to Harikrishnan, the company is already progressing towards double-digit EBITDA level and hopes to garner net profit by 2013-14. “It will turn out to be a very good investment of ours,” said Harikrishnan. What also gives comfort to the investors is the fact that they don’t see Spykar as a retail business but a brand which has huge recall among the youth.

But this is not something new for Harikrishnan. His first job in the second half of 1990s, before he moved on to the world of venture capital and private equity investments, was with the textile firm Bombay Dyeing that has a strong brand recall at the consumer level, even if the company is now a pale shadow of its past.

It is essentially back to basics for Spykar, a firm started way back in 1992 by first-generation entrepreneur Prasad Pabrekar who ventured into fashion apparel and accessories after leveraging his technical knowledge in processing denim garments. And the company was performing well until a few years ago. In 2004, Avigo had picked up 30 per cent in Spykar for an undisclosed amount.

But soon after that, Spykar succumbed to an overexpansion drive. For instance, the company’s move to launch children’s brand OYO (a premium kids’ wear fashion brand) backfired as it was followed by the global economic downturn, which prompted consumers to hold back spending on discretionary items such as apparels. As a result, over 35 properties that Spykar had taken on lease for OYO and VOTO brands (a premium brand for youth) at prime locations at a premium, soon became a liability.

Now, in a management overhaul, the company is hiring a CEO and a COO. The interviews are currently on, with three candidates already shortlisted for the positions. The investors are also seeking advice from brand consultants and retail experts to professionalise the company.

Although there is a rapidly growing middle-class population with disposable income, a few retail firms cannot get it right, primarily due to overexpansion and slipping into a huge financial burden because of the high-cost real estate locations. Also, limited scope of foreign investments has resulted into lack of depth and scaling up.

Incidentally, Primus Retail sold apparel brand Weekender to finance firm Madhusudan Securities for Rs100 crore in February this year and in March, Vishal Retail sold its wholesale retail business to private equity firm TPG for over Rs 70 crore. This has often brought up the question whether Indian retail space is ripe yet for PE investing. However, there is much optimism to be seen among those concerned. “PE investing in retail makes sense if you do the right thing,” adds Harikrishnan. This caveat is important, considering the failures and the subsequent liquidations of retail companies.

But for Avigo, which is a small, mid-market SME-focused firm with some $365 million of assets under management, the game is only getting bigger.

The private equity firm is also attempting to do controlled or majority transactions with a few other portfolio companies. According to industry observers, the active involvement of PE funds in their portfolio companies happens mainly to protect their investments during the lean deal-making period and to develop a unique positioning with the LPs for future rounds of fundraising. Determined to play a more active role, some PE firms are also beginning to build operating teams that they can put to work at portfolio companies. 

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