Private Equity (PE) in India has been playing a significant role in providing growth capital to Indian entrepreneurs and has helped them achieve their growth aspirations in a lot of ways. In my view, Indian PE players perform a key role in bringing global corporate governance practices to the investee companies and contribute by sharing their knowledge of global best practices with Indian entrepreneurs.
As the Indian PE industry reaches the maturity curve, conflicts and concerns regarding corporate governance practices in investee companies are being observed.
It is often said deal momentum is good but valuation differences are significant to close deals. Assuming the sound underlying business drivers and good entrepreneurship abilities of the founder, PE funds are closely evaluating quality of governance standards, reliability of financial statements and business ethics of potential investee companies.
PE funds are willing to pay a premium for companies with good governance and ethical standards, and increasingly shying away from transactions which indicate weak governance and ethics.
In my view, there are certain perspectives that possibly are becoming relevant in the current PE deal environment:
Valuation Focus Is Good But Not Great
Revenue Growth Is Good But Bottom Line And Cash Flow Are What Matter Finally
While the revenue growth story is a fantastic story line, probably the focus on profitability and bottom line is the key to derive value.
The urge to achieve revenue growth should not, in any way, dilute the importance and need to drive profitability and cash flows. Let us not forget that the underlying driver of the business remains profitability and cash.
Transparent & Good Governance And Business Ethics Are Value Differentiators For PE Funds
On the contrary, businesses with weaker governance standards are not finding it too easy to close transactions.
International investors and corporate houses are increasingly becoming concerned with increasing regulations on FCPA and Anti-Bribery Rules, as well as accounting standards and reporting mechanisms.
Intangible Value Drivers For Good Governance
With effective corporate governance based on core values of integrity and trust, companies will have competitive advantage in attracting and retaining talent and generating positive reactions in the marketplace. If you have a reputation for ethical behaviour in today’s marketplace, it engenders not only customer loyalty but also employee loyalty.
These would drive two key business drivers – attracting and retaining quality clients and quality people.
It’s possibly important to recognise the need to gauge the impact of good governance standards and practices in valuations and raising funds from PE funds.
As Warren Buffet had said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Not only the valuations and pricing can be measured and quantified, but also the importance of the intangible value of business practices and governance standards which would attract the appropriate investor class and drive the growth agendas for Indian entrepreneurs.
(These are personal views and not views of the Organisation).
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