Private Equity and Venture Capital deals have grown from US$2 billion per year in 2004 to US$2 billion a month in 2018, on average.
- Deepak Bhawnani
Private Equity in India has evolved over the past two decades to a significant level of sophistication and continues an upward momentum. Private Equity investors include a variety of participants, as there are the big multi-billion-dollar funds, medium-sized funds, and those investing in start-ups or niche players, and some more recently looking at distressed and special situations. Many have a full in-house setup in India for statistical, financial and economic research, supported by legal and financial experts.
Private Equity and Venture Capital deals have grown from US$2 billion per year in 2004 to US$2 billion a month in 2018, on average. In the second quarter of 2019, India had foreign exchange reserves of about US$425 billion, and Mutual Funds have US$380 billion AUM. These numbers reflect a very robust investment environment.
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In the late 1990s, when I returned to India, the FDI investment scenario was different. At that time one of the USP’s of a potential investee entity was its ability to have the right connections, as good political relationships were considered an advantage. Today the focus is on investing into entities in India that are resilient operationally in any political structure.
There are various risks to be considered when investing in any country. These include operational, financial, policy, regulatory compliance, geopolitical, and, of course, reputation.
Where the burn rate exceeds revenue leading to liquidity issues becomes a business call, since this is a reality in many new ventures focused on market share, more so given India’s sizeable population and geographic spread. In the regulatory compliance area, issues are two-fold. One is the lack of control or oversight that arises out of insufficient structure or processes in the venture leading to compromise in corporate governance. Another may be shortcuts taken or non-compliances not being identified until it is too late to address appropriately. To a large extent, robust compliance and processes with regular rigorous audits may address such risks.
A key area for PEs to consider external professional services is for high quality, rigorous, experience-driven due diligence and post-investment monitoring. This aspect, i.e. a review of reputation risk, is separate from the financial and legal diligence.
Maintaining one’s reputation both for the PE firm and the deal team is sacrosanct. A private equity fund must have confidence that the entity or brand it invests in has maintained integrity in the past, and that it also takes protecting its own reputation seriously.
An additional layer of risk to consider is when the investee determines its growth path by franchising. Here reputation checks on these third parties who would be using the corporate or brand name of the investee, are just as critical as those applied to the investee entity. Another example would be of investee entities dealing in financing or insurance products who need to ensure corporate governance by its DSA’s, and in turn, their sub-agents/sub-brokers maintain the brand’s dignity and reputation.
With the number of investment firms increasing, global funds must assess risks at each portfolio/investee company more closely. Done early and thoroughly, due diligence checks are crucial for risk mitigation at the portfolio level. When supported with appropriate monitoring, and propagated corporate governance, investing in the Indian market is viable and returns can exceed expectations.
Deepak Bhawnani is CEO at Alea Consulting. Views expressed are the author’s personal.