Page 3 of Summary of Events

At the “2 Days Extensive Workshop on Private Equity ".

1st and 2nd August 2008, Hotel J W Marriot , Mumbai

 

 

Mumbai Page 1

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Mr Utpal, Rare Enterprises

 

PE is happy to share on the "upside"    but sometimes relations get bad during the "downside".                             

 

PE is not a winner                              

Company is the actual winner                                   

He is just a participant in the winner                          

 

       PE           =          Opportunity + capital + Management    ..

 

 

Target Company Must have a competetive advantage

If you don’t have any of these 4 M’s ŕ it is  a “no show”

 

Non-linear growth model required

with every 20% inc in Sales,     must have 40%-80% inc in profits

and that is not just financial leaverage

and that is also operating leaverage

 

 

 

 

Who Creates value ? ( PE or the company )

The speakers gave the example of “WIPRO Limited”.

WIPRO is listed. Mr Azim Premji owns 80%

But his Net Worth is high, since, its shares value is high, "in the eyes of the stock market" Stock market values its 20% ( Owning Just 20% ). And helps to increase the net worth of Premji’s  80% too.

 

PE helps you create the future value

 

Mr Uppal commented that

  • Some entrepreneurs, want highest first initial value

  • Have a bigger vision

  • Let him enter low

  • And exit high

  • He wins, and also giving a enormous value to your 80%

 


 

 

Mentoring by VC

 

PE provides a different thought process

that is the mentoring , “What company really wants ? “

VC is not venture Capitalist alone, he is also a mentoring capitalist

 

VC helps management think through.

Better decisions, are made.

 

Even the Managements who are not articulate, traditional, transform themselves in the long run.

 

 

Importance of Long Term vision

 

Ideally, a PE should have a vision for 5 to 7 years

They are usually for shorter period.

Generating 100% in one year is easy

But 40% consistently for 5 year is good, but very difficult.

 

When we select the PE, we must see the no of years of future partnership. If there is a long term focus, the promoter and his company is not IRR focused, quarter to quarter, and instead is having a long term vision.

 

Other Advantages of the P.E. player

 

When you are head-hunting

Trying to convince a Top-Notch target employee

the PE can convince

This is an endorsement effect

helps attract talent

 

When You Are In an IPO

Trying to convince the Target Public

The PE Can Convince

This Is An Endorsement Effect

Helps Attract Money in an IPO

 

When you are doing your own product marketing

Trying to convince the customer

The name of the PE can convince the customer about your credibility.

This is an endorsement effect

Helps Attract Customer

Example : A PE arm of a particular Bank having taken a 5% stake in “Property Builder” BPTP has given a higher credence to it. Both for allotment of SEZ lands and the sale of towers and flats in its properties/cities.

 

 

Management Team Composition At P.E.

In India , they are usually CA/MBA - Finance / Marketing Only.

But, In USA, they are a combination of operating General Managers also

That adds even better value.

 

 

 


3 E’s from the Promoters ( What are they ) ?

 

EGO's

of the promoter

Emotions

of the promoter

Expectations

of the promoter

             but promoter must be realistic

 

All these Ego, Emotion and Expectations of the promoter must be realistic.

Extremities, don’t help the case.

 

3 E’s from the Private Equity Partner ( What are they ) ?

what PE can give – in form of 3E's

Enlarging the canvas

for the company

Escalating scalability

for the company

Enhancing the strategic framework

for the company

 

The promoters, usually working on "GUTS". The PE helps in making this more scientific. How? Due to his wider knowledge.

Example :

Whether cash flow is good or not ?

DE is correct or not ?

Risk is ok or not ?

Further expand or not ?

Sometimes the entrepreneur may get carried away - think fashionable, doing a big amalgamation ŕ PE may guide, “Listen, this company is going bust, and market is not good in other parts of the world, so please think again”.

 

PE gets involved in all Big, and Critical Business decisions.

 

 

Mode of Exit : ( What is that ) ?

 

Already part of the SHA= agreement

Logically, we must not "Plan to divorce, before marriage".

Some PE Funds, do not "force an exit clause"  in the agreements.

if the company does well, multiple options will come in

if the company does NOT DO well, all options will be ZERO

 

Nobody can envisage, what will happen after 5 years / 10 years.

 

However generally the PE’s keep a Exit option in the agreement.

 

 

Exit from a SME ( Small & Medium Enterprise ) : ( How is that done ) ?

 

“When we get in,  we understand the company will do well.”

In India , a Trade Sale, is considered a failure. &  Selling co, is admitting defeat

But , in PE, this is a rule, PE has to come out of it, then and only then, PE manager has made any profit from the PE fund and PE stakeholders.

So, as a rule, PE manager, sees if the company can do an IPO in 5 years maximum.

And its current & future revenue, profit must be of that scale

 

Part Exit

Divorce / exit is sometimes not divorce

This is sometimes, reduction from 20% to 15% or say 5%.

so, take the capital out,  for further market deals

balance continues to grow.

 

 

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