Private equity is a creative mode of financing

Private equity is a creative mode of financing and investors invest with the aim to exit to earn profits. Ajay Kapur (CEO, SIDBI Venture Capital) adds, “The investors values the investee on comparable multiples and more so where the investee company is likely to witness growth by the time the investor wishes to exit. A clear exit strategy and possible mechanism are prime considerations.” There are few ethical investors who do not invest in companies, which in the near future, might compete with their existing investments. This stands out to be an important parameter for selection of startups. The investments are often followed by efforts at streamlining to revive the loss-making companies or substantially improving the performance of profit-making ones. Since private equity companies derive their returns from the appreciation in the value of the acquired asset or company, they ensure that they offer much more than financial assistance in terms of the offering they bring on the board. These efforts are aimed at adding value to the investments before the private equity investors can exit.

However, after the dotcom bubble, and given the risks, hard work and patience to earn returns, there is some form of reluctance on the part of the investors to invest in a start-ups. Many analysts are of the opinion that unless there is an overcrowding in the PE space or else the pricing becomes unattractive, most investors are not likely to revert to early-stage deals.

The industry certainly thrives on a disparity of views, but nevertheless it’s continually growing. In the present financing scenario, it is all the more important than ever to have a business plan, pitch and value proposition even before the investee companies hold talks with potential investors. Any investee company with a potential, a committed and experienced management with sound track record, capacity and organisational skills to implement business plans into actions can easily grab the attention of the PE biggies. The investors on their part gain exposure to specific markets by being specialists.

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Source : IIPM Editorial, 2008

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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