India’s Growth Through PE

India is now becoming the central hub of investment for many multinational companies, as the profit margin is growing day by day. Venture capitalists and private equity fund holders are rushing towards Indian companies in every segment of the market. The investors are opting to look at the diversified nature of the current market scenario and deciding on their portfolios. The inflows are increasing and new start-ups are hence, gaining benefits. It is not only the capital inflow flexibility, but, also the capabilities and technology that the companies are earning and implementing for their future decision-making.

Private Equity investors have their own prerogatives to deal with any company. The Small and Medium Enterprises, (SMEs) in India are getting huge benefits from private equity investments. Investors include global firms like Blackstone, Morgan Stanley, Chrys Capital, hence reaching international standards. The amount of investments has already outnumbered the expectations and in the coming years, India is expected to reach the pinnacle of success.

Private equity has been a major player in the growth history of India for last eight years. Companies, backed with huge funding, are investing in lucrative start-up ventures and enjoying the benefits. Private Equity funding is increasing in India, as investors are eyeing long term benefits. This in turn, is also helping new start-ups to make their presence felt in the global scenario. It is hence, a mutually beneficial strategy for both the parties. Big private equity players like- Blackstone, Morgan Stanley and Farallon are entering into India and surveying the market. They are funding some of the ventures and even entering into a partnership with certain select firms.

The contract is of two kinds; the venture capitalists may be one of the shareholders or he may continue to take the profit for a certain period and leave after that. Generally, this depends on the terms and conditions of the PE fund.

Sales opportunities are significant and realized faster with PE capital. Further, surveys reveal that a PE backed company shows higher growth in sales as compared to a non-PE backed company. A significant improvement in profitability has also been witnessed in PE backed firms, especially true in cases of MBOs, or management buy-outs, where the impact of the entrepreneurship spirit is reinforced by PE.

The investors also follow certain strategies. The most popular one is to improve business performance, which is achieved through either increasing sales, or reducing costs, or a combination of the two. Further, to improve cash flow, key resource areas and assets are restructured, and working capital is reduced. Redundant elements are done away with, or changed in accordance with prevailing market conditions.

Another strategy is, to regroup and focus. This strategy aims at re-engineering the existing business by reducing complexity and by concentrating on core competency elements. It can be applied at all levels of the business value chain. For instance, at the business level, the businesses are separated or are integrated with other firms. At the supply chain level, the non-competitive processes are outsourced, and at the product level, the weaker products are eliminated.

Another strategy is, to buy and build. This strategy is gaining popularity among PE investors to quickly achieve size and scale of a large company. Key to the success of this strategy is to enhance margins by improving competitive position.

Other value enhancements include tapping cross selling and branding potential, growth from geographic expansion and new products, and partnering and licensing new business models and strategies

PE funds put additional efforts to prepare the company for IPO, both in terms of their industry relationships as well as business growth

The SME sector in India was lagging behind for a long time due to capital constraints. It did not have easy access to affordable terms of credit Hence, SMEs could not expand their projects on a large scale. To rescue them, the PE investments came flowing in and gradually, a hefty amount of funds helped them to grow.

India being one of the major destinations across the globe for inflow of US dollars, the private equity deal value has increased to $19 billion in 2007.

Let’s hope that this rise in investment continues, as India progresses on her path of development.

Tamal Roy


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