India has emerged as a leading investment destination for investors and business owners across the world. Businesses in India have tapped several sources of funds to fuel their growth ambitions, with each source having its pros and cons. Among these, private equity (PE) funds have, more often than not, been the partners of choice for high-growth companies, and have consistently proven that their advantages extend far beyond just financial support. In this article, we delve deeper into the merits of getting a PE fund on board and the various aspects to be considered by private business owners before they opt for this route.
What makes a good candidate for a PE fund?
PE funds look for businesses that can effectively generate free cash flows, and have a high-performing management and long runway for growth. They primarily follow a buy-and-build model wherein they acquire businesses and aim to deploy several value creation strategies by scouting for future synergies, potential add-on acquisitions, revenue maximisation and cost savings opportunities.
Here are a few aspects which set successful private businesses apart:
- attracting and retaining the right talent
- robust internal control measures
- strong corporate governance
- ability to identify value-accretive acquisition opportunities
- ability to continously adapt to the changing competitive landscape.
PE funds usually have a defined investment holding period of five to seven years. Therefore, they have an incentive to do whatever it takes to ensure that their portfolio company is in a marketable position at the end of their holding period.
How do PE funds participate in the growth journey of private businesses?
In order to help their investee companies grow and create value, PE funds loop in the most capable professionals from each identifed key performance area. As per PwC’s 2024 Digital Trends in Operations Survey, companies expect to make new digital investments in cybersecurity and data privacy along with a heavy focus on sustainability and ESG reporting.1 Further, as per PwC’s 27th Annual Global CEO Survey, 60% of global CEOs are planning to make at least one aquisition in the next three years.2 PE funds help private companies chart their own growth trajectory by getting the right experts on board to bring these aspirations to life. Some other areas in which PE funds have been investing heavily for their portfolio companies are as follows:
- driving organic growth using digitisation
- finding new revenue streams and entering new markets
- deploying cost optimisation strategies
- leveraging the power of data using data analytics
- implementing a suitable ERP system and integrating it with the rest of the IT infrastructure.
Along with providing companies with the tools to grow, PE funds offer other intangible advantages as well:
- solutions for companies facing challenges related to succession planning
- doing away with key person risk by bringing in professional management with functional expertise
- preparing companies to enter the public market by strengthening processes, governance and attracting more investors.
Thus, an investment by a PE fund is far more than just a transaction. The transaction is followed by an elaborate transformation process. The objective of transacting to transform is very clear in the minds of PE funds, and they play a significant role in creating sustainable, profitable businesses.
Brief overview of the fundraising process for a private business
While there are several benefits of getting a PE fund on board, the process of fundraising has its own complexities and nuances which are difficult to naviagate:
Steps in the fundraising process
For a private company, the above process could seem to be daunting at first. However, there are a plethora of services which companies can use to get a grip on thie process and successfully get the right PE fund on their cap table.
Considerations for private businesses while selecting a PE fund
For private businesses who want their business to grow through external capital, it’s essential to ask the right questions before getting a partner on board.
The primary question to ask is, Who is the right partner with whom I can take my business to the next level? This holds true whether a company is selling a minority stake and retaining control or selling a majority stake and maintaining a smaller degree of involvement.
There are several qualitative aspects a company must look at to evaluate whether a PE fund is the right partner for it and if yes, which one it should choose. Some considerations are as follows:
- whether the fund has experience in the company’s industry
- whether the fund intends to align with the exisiting capabilities, values or plans of the company
- the fund’s management approach – degree of transparency expected, involvement in day-to-day functioning of the business, including negotiating terms with key suppliers and customers
- whether the fund has adequate resources and the right connections to propel the business’ growth ambitions
- the fund’s investment time horizon in order to understand the duration of the relationship.
Private companies (especially family businesses) have traditionally been wary of letting PE funds take a slice of their business. However, PE funds have often managed to create meaningful, amicable partnerships with private businesses by being with them through thick and thin, helping them achieve their growth ambitions and, at the same time, generating high returns for their limited partners.
Given India’s conducive economic environment, there has never been a better time for private businesses and PE funds to join hands and contribute to the country’s evolving growth journey!
