In India, PE investors should back entrepreneurs more than businesses, say experts

By VCC Staff

  • 19 May 2014

Private equity firms traditionally pick up tried and tested methods of investing and running a company. At the recently concluded VCCircle India Limited Partners Summit 2014, eminent panellists discussed various styles of investing in Indian companies across early or late stage. The panel moderated by Jaganath Swamy, VP, Harbourvest Partners (Asia) Ltd, brought out some interesting aspects on investment models that work best for private equity in India. Following are some of the forward-looking observations made by the panellists: 

Shankar Narayanan, Managing Director, The Carlyle Group:

“We have been quite successful in the investments we have done primarily because we try to back entrepreneurs with passion. In India, more than backing a business you should back the entrepreneur. By and large, if you get the entrepreneur right, even through ups and downs in the business, you will get it right. In India, between private equity players and most investment bankers most people end up buying an egg for the price of a chicken. And then if the egg hatches and becomes a chicken maybe you will get your money back but if something happens along the way, you end up losing your pile of money. I think 95 per cent of the companies in India haven’t figured out that you should take money when you get it not when you need it because when you need it most people do not want to give it to you. Most entrepreneurs who do a deal with a good partner and build a business generally tend to thrive. So at the end of the day you need to look for drive, enthusiasm and integrity in entrepreneurs.”


Sanjay Kukreja, Managing Director, ChrysCapital Advisors Pvt Ltd:

“Firstly, getting the right entrepreneur is important; secondly, one should get the business right. Thirdly, it is about valuation and lastly (it matters) how you work with the entrepreneurs. There are three or four sectors that have constituted the bulk of returns like IT, financial services, healthcare and consumer. The challenge is the composition of these four sectors in a GP’s portfolio is between 20 per cent and 25 per cent. A lot of the remaining goes into manufacturing, infrastructure, microfinance and power and many have not worked out. But in the future, new sectors can come in. So the challenge is how to really build sector expertise. So your ability to spot the right company is much better if you have sector expertise.”

Sandeep Singhal, Co-founder & Managing Director, WestBridge Advisors Pvt Ltd:


“Make sure that your fund concept is right, your bar is really high and your entrepreneur is a guy who passes all the tests that you set. Most importantly it is the markets which are going to help you give great exits. But you have to recognise such companies five or seven years ahead and it means that you have to have the ability to hold that company for a long period of time. Investors have held on for a longer period in companies that have given fabulous returns.”

Rajeev Agrawal, Managing Director, Ambit Pragma:

“One of the fundamental challenges of PE has been a lack of belief. A lot of energy is devoted in making investments, in structuring things right, in having the initial conversation whether I can exit or not but holistically examining a transaction whether I can truly believe that I can exit this company or not is something that is lacking. That said, I believe that most strategies in India should work; of course, certain nuances are there like the entrepreneur is very critical and the business is very important.


We do control transactions in companies where we realise that the promoter has lost the impression or capability of how he is going to take care of the company—also, when we feel that our exit position is going to be superior. When we invest in a small company, we are not going to find good enough exit options if we hold a minority stake. Secondly, expense management comes very naturally to professional managers unlike promoters who do not consider it because they come from large corporate backgrounds.”

Kanchan Jain, CEO & Principal Managing Partner, Religare Credit Advisors LLP:

“I have seen many young establishments have the biggest bottleneck which is access to capital. When the ticket size for capital requirement is below Rs 50-100 crore, companies fall below the radar of PE investments. This leaves very little deals to choose from. You see a lot of situations where growth capital is required. But there is either a hesitation to dilute it or just uncertainty around how it is going to work out. What is really lacking is a true private entrepreneur story. One needs more of these credit bureaus because there are blurred lines between promoter funds and company funds and transparency is a challenge.”


Raghubir Menon, Partner, Amarchand & Mangaldas & Suresh A. Shroff & Co.:

"In the past three or four years, we have seen lot of structured debt and structured transactions happening. One of the reasons behind this is that there are companies which do not have enough equity to dilute more because they have already got in private equity money. Now they have reached a stage where they need to give an exit to the existing investor and at the same time take their company to the next level. Here, a lot of returns are linked to performance and therefore, we have seen many structured transactions in the past few years.”


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