With the Indian economy finding itself at the crossroads of numerous disruptive macroeconomic factors and global slowdown, it is time for SMEs to gain a broader perspective of their troubles and discover the means for success.
Apart from providing the much-needed financial oxygen to SMEs, private equity infuses valuable business intelligence pertaining to a spectrum of horizontals into SMEs, depending upon their need and situation.
It provides SMEs with know-how in several areas, including demand-generation through affordable means of marketing that enables SMEs to stand out in the marketplace. Private equity firms also supply Indian SMEs with the financial ammunition to stand at par with foreign competition in terms of technology as India’s trade agreements are further liberalised.
In such a scenario, innovation and differentiation are the drivers of SME growth. So, along with organic growth, SMEs are also recognising the need for inorganic growth through global mergers and acquisitions. Many Indian firms are considering acquisitions, particularly in Europe where they spot value.
To this end, PE professionals have brought SMEs deal making skills and global markets expertise. SMEs rarely have the financial power to attract deals based on their balance sheet. Not only do PE funds help SMEs in this regard, but they also ensure a better footing for them in the valuation process and in negotiating the transaction structure. The relationships they share with investment bankers, consultants and advisors bring this about.
With expertise at hand, promoters are able to recognise and attract human resources with skill-sets that were unavailable to the organisations until now. These resources may then be used to create a loyal client-base rather than simply attract new markets. For those SMEs that have achieved growth based on bagging clients in their networks and closed user groups until now, acquiring new clients would bode well in the short-term. In the medium term, bringing efficiency into systems and processes can create incremental value.
PE professionals bring wisdom pooled from their varied experiences in diverse companies and industries to the table, and fill promoters’ knowledge gap in advanced value creation by expanding markets, enhancing products and services as well as improving work processes and business partnerships.
Requisites for levelling up
The Indian government was disillusioned with the ‘Trickle-down theory’ decades ago, as recently reiterated by President Pranab Mukherjee who was previously the finance minister. Measures are thus taken to address issues bottom up. In this context, SME growth is not assumed to increase as the economy strengthens and thus policies are prudently framed to directly promote SMEs. Today, the government is developing a healthy environment for Indian entrepreneurships as evident from moves such as allowing medium-term loans, reduction of interest rates by RBI and efforts to curb inflation.
Since SMEs will continue to be the cornerstone of any bull-run in the Indian economy, investing into SMEs in the immediate future could provide fruitful returns. As the private equity industry matures over time, SMEs will secure crucial capital and managerial and operational expertise, making them competitive in an increasingly globalised economy.
(Mohit Ralhan is Managing Partner, Indus Balaji Private Equity)
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