| Role of Private Equity in India's growth story | | | | have the internal capabilities by way of their global |
| Pick up any day's financial paper and you are sure to | | | | expertise in businesses to assess these and increase |
| come across an article about a private equity deal or | | | | the internal effectiveness by reducing bottlenecks |
| an entry of a new player with a huge corpus of | | | | and increasing the sales and marketing efforts. |
| private equity fund. The three quarters of 2007 has | | | | Regroup and Realign |
| seen investment by Private Equity players in excess | | | | This strategy has already been mentioned in parts. |
| of $10.2 billion with over seven $100 million deals. | | | | This would target reducing complexities and |
| Warburg Pincus PE which initiated this action gained | | | | concentrating on core competencies. The strategy |
| over $1 billion from their deal in Bharti and has led | | | | employed at this stage should be short to medium |
| other major players like Blackstone group, Lehmann | | | | term and long term initiatives and actions that need |
| brother PE, Goldmann Sachs PE to follow into their | | | | to be taken to improve operational effectiveness and |
| footsteps. | | | | achieve a better growth trajectory. This would |
| Private Equity Perspective | | | | require a strategic redirection of the organization, |
| The Indian economy is growing at near double | | | | such as divestitures, outsourcing actions, buying |
| figures. The future outlook is very bright in all | | | | decisions, expansion to newer markets or |
| industry however; there is still a huge demand supply | | | | geographies and streamlining of operations including |
| gap which exists in India in all sectors, demand | | | | risk management. This strategy would create |
| exceeding supply. The need for a $320 billion | | | | immense value in medium to long term for the |
| investment in infrastructure alone to maintain the | | | | stakeholders. PE firms should look to employ this |
| current growth momentum according to recent study | | | | strategy once they rope in the required management |
| conducted by the state reiterates this point of view. | | | | and increased the internal effectiveness of the firm. |
| Thus the growth potential for the firms which are | | | | Expansion through Organic and Inorganic growth |
| part of this India story is unimaginable. What this | | | | This is a simple buy or build strategy that the firms |
| means is that India is red hot in terms of potential | | | | can undertake. The capital injected by PE could be |
| markets for PE investments. The firms generally look | | | | utilized to further add capacities to the organization |
| for a 25-35% IRR as compared to 20-30% in | | | | or M&A exercise could be carried out to |
| developed markets like US and UK. The gestation | | | | increase the firms' operations. Indian economy is on a |
| periods in a few sectors as the Bharti deal points out | | | | rise and every firm is looking to grow in all directions, |
| is also lesser. The regulatory environment is benign | | | | however many firms do now have the technical |
| and the primary and secondary fixed income markets | | | | expertise or the industry knowledge to divest their |
| are also maturing. All in all the current financial | | | | portfolios. A Private equity usually has a diverse |
| eco-system is suited for better and more mature | | | | portfolio and thus the expertise in various industries |
| investments which the private equity firms are able | | | | and domains. They can help to form strategic |
| to provide. Add to this the PE firms own capabilities | | | | alliances, partnerships as well as acquire value added |
| add immense value to the target as they try to | | | | firms especially foreign partnerships and firms. Private |
| squeeze out all possible synergies and create a | | | | Equity can also help the firms achieve organic growth |
| potentially better firm. | | | | by identifying potential markets and geographies to |
| Strategies to extract the maximum value | | | | venture into. The key to a successful growth |
| The valuations of many Indian firms are getting larger | | | | strategy is to enhance margins by improving |
| and PE firms have to employ both the generic as well | | | | competitive position (by creating higher entry barrier |
| as the non-traditional strategies to ensure adequate | | | | of greater bargaining position as a buyer or supplier) |
| ROIs. The paper suggests possible strategies that | | | | and harnessing the scale efforts in internal operations. |
| would create the maximum value. | | | | This is however the last strategic exercise that the |
| Differentiate | | | | PE can hope to achieve due to the five to seven |
| The most important strategy as we know is that of | | | | years horizon that they usually have in mind before |
| differentiating. Differentiating is the most critical way | | | | they exit |
| for any firm to create value. PE firms could provide | | | | Strategies for Public-Private Partnership |
| the latest technology and global expertise. PE backed | | | | PPPs are being viewed as the key long term business |
| firms can look forward to better and larger | | | | opportunity for large-scale private investment in |
| investments based on domain knowledge of the fund | | | | infrastructure and economic development of the |
| managers and the management of the Indian firms. | | | | country. They provide an enormous business |
| The synergies would be a result of the current | | | | prospect for private institutions with the potential of |
| processes of the firm and the processes that the PE | | | | attractive future returns. However due to the |
| hopes to bring to it. This could result automatically in | | | | gestation period and role of public player the |
| operational efficiencies. | | | | strategies employed in this domain of business by the |
| The strategy would be visible firstly in the structure | | | | Private Equity should be slightly different. These are |
| of the deal. Depending on the horizon of the deal and | | | | usually project based and the value generation is only |
| the type of interventions mentioned Indian firms can | | | | visible over a period of time. |
| look to differentiate themselves from their | | | | India has multi-billion dollar requirement for |
| counterparts by getting their hands on necessary | | | | infrastructure investments. PE can either go for a PPP |
| capital for investments, technology which could result | | | | model or inject capital in an infrastructure firm which |
| in economies of scale and scope and newer possible | | | | could carry out these projects. The role of the |
| markets. In study from Netherlands the ratio of | | | | government is to identify well structured, financially |
| CAPEX to revenues grew from 4.6% to 5.9% after | | | | viable PPP projects and build a repository of these. |
| PE injection. This model would definitely be replicated | | | | The strategies that can be used in this domain are as: |
| in India. PE injected firms can also hope to witness | | | | Improve performance. |
| higher investments in R & D which would in turn | | | | The project should be made leaner and resource |
| lead to innovations, technological advancements and | | | | utilization should be highest. The working capital |
| structural transformations. The synergies realized | | | | should be kept at an optimum level. PE's expertise in |
| would create higher quality of life and definite value | | | | past projects and technology should be utilized to |
| for the stakeholders. | | | | reduce operational costs and improve operational |
| Restructuring | | | | effectiveness. Industry experts who have worked |
| PE backed firms are leaner in structure elsewhere | | | | on similar project in the past with the Private equity |
| and this could be a good model for India. Indian Debt | | | | player or elsewhere should be brought in to ensure |
| market are still at a very nascent stage thus PE can | | | | timely and effective execution of the project. The |
| bring in financially innovative product into the portfolio | | | | knowledge that the private equity player has |
| of the company and make a necessary change in | | | | gathered in the past about similar project is by far |
| capital structure of the firm through financial | | | | the most important and vital resource. The synergies |
| reengineering, which will affect the bottom-line and | | | | should be realized out of the processes and |
| squeeze out better performance. | | | | capabilities of the two partners. |
| By restructuring assets and key resource areas and | | | | Capital |
| by reducing working capital, a lean firm would ensure | | | | Another useful strategy could be in terms of capital. |
| asset effectiveness. Focus on a few SBUs or | | | | PE firms are capable of bringing financially innovative |
| resources while divestments of others could be a | | | | products. They can also ensure that the project is |
| vital restructuring exercise carried out. A good | | | | optimally leveraged. These small measures could |
| strategy would be to divest those assets below a | | | | reduce operational costs as well guarantee that the |
| certain pre-defined ROA and invest in better assets. | | | | project becomes leaner and output per resource |
| Another restructuring initiative could be to change the | | | | increases. |
| power structure of the organization. PE firms will | | | | Conclusion |
| ensure that the organization becomes leaner and | | | | Valuation is the most important thing when it comes |
| meaner and in the process will reduce or eliminate the | | | | to finding a good investment. The firm will spend |
| inefficiencies created by the power equation of the | | | | months in trying to come up with the valuation with |
| firm. Many Indian firms are still family run businesses | | | | multiple due diligences and conservative view key |
| and have in the past shown signs of bureaucracy, | | | | performance indicators. The valuations depend on the |
| however once a PE injects capital this can hope to | | | | timing of the deal and many firms actually do multiple |
| change through several initiatives like a balanced | | | | valuations factoring the different time periods when |
| scorecard approach to employee performance and | | | | the deal will take place. The valuation is also based |
| linking executive salary to performance | | | | not only on the target's capabilities but the capabilities |
| improvements. This would ensure an alignment of the | | | | that the PE player is going to add along with the |
| complete organization and increased efficiency of the | | | | financial reengineering and the change in management |
| overall firm. | | | | that will happen once the deal takes place. The |
| Improve performance | | | | strategies mentioned in the paper are utilized in |
| A generic strategy employed right after the transfer | | | | accessing the right value for the deal since they |
| of ownership. There is a sole focus on key KPIs or | | | | indicate the potential synergies that can be leverage |
| cash flows alone for the firm instead of the usual | | | | from the deal. |
| earnings, EBIDTA etc. This focus allows the | | | | Of late the Private Equity firms have been accused |
| management and the firm to think and focus in one | | | | for pushing up the valuations of firms and beyond |
| direction and become more efficient and effective. | | | | the reach of a strategic investor. However the |
| Better management focus | | | | valuations that happen are based on the capabilities |
| PE firm's global expertise in business performance | | | | that the PE investor can add to the firm and thus |
| should be leveraged to manage the firms better. | | | | differ from one PE to another based on their |
| Another generic strategy is to bring in key industry | | | | understanding of how they can create value for the |
| experts on board. The technical and business | | | | firm. Thus the spiraling of valuation which is currently |
| expertise of these individuals creates an intangible | | | | being witness is a result of how the PE investors |
| value for the firm. PE firm allows the leverage for the | | | | believe they can get most out of the company. |
| management to think big and long term. They are | | | | Thus the investments are very much strategic in |
| also known to watch the management closely for | | | | nature. For a public traded company the equation |
| performance and delivery of promises. Since there | | | | remains much the same. When the deals usually go |
| are no quarterly results that need to be delivered | | | | though, there are expectations of great change in |
| management focuses more on the business and less | | | | the functioning of the firm to streamline the PE's |
| on giving guidance and interviews. | | | | strategy with that of the firm and to realize the |
| Internal effectiveness | | | | synergies and unlock potential value as early as |
| Top line (organic) growth is virtually a risk-free way | | | | possible. This creates value for the shareholders |
| for the performance of the firm to grow. This is | | | | instantly in these firms. |
| primarily as internal effort which requires little cash, | | | | To sum it all the most common value generation |
| however it requires an alignment of the firm internally | | | | programs are those which combine more than one |
| and externally to achieve the key goals. It requires | | | | strategy or more importantly timely use of |
| knowledge about the eco-system that the firm | | | | strategies. However, tailored strategies are the best |
| operates in, that includes the customers, suppliers, | | | | strategies as there is no universal approach to value |
| partners and the competition and market. PE firms | | | | creation. |