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Private Equity and the invested company

I am not sure how USA’s Private equity worked with the SME’s in the early years. In India, it is very difficult to get money from banks unless your company is making substantial profits. The country’s reserve banks guidelines to commercial banks are strict and major deviation can land commercial banks in trouble.
Hence Private equity companies have been the fad of the day. Entrepreneurs willing to make it big cannot go to the typical banking system and would endeavor to pursue their dreams even if it meant sharing the kitty by way of diluting their interests.

Fundamentally, a start-up, even if started by a b-school graduate will not have either the knowledge and experience of running a business but may have the skill of closing deals. So what happens to the start up organisation.

S/he starts the company with a few deals clicked with his skills and over a period of time – a year to 5 years s/he creates a big topline. As s/he moves on, s/he gets more private equity, keeps micromanaging the business as s/he feels that no one can do the business better than him/her. Soon, s/he starts feeling exhausted both physically and mentally as due to lack of either vision or experience the burden of managing comes in picture and s/he is not able to cope with it and s/he starts making basic mistakes that results in gradual non performance. The game changes from short term to shorter term where the thought process may change to moving out and exiting the business sooner.

The burden starts catching up and PE investors slowly getting heavy on him/her for slow or non performance. S/he then takes series of decisions that results into disasters like either appointing low cost people with limited skills who would keep nodding their heads for every good or bad instruction to keep their jobs secured or s/he may get highly paid post graduates from premier business schools assuming that they will be able to turn around the company, a high expectation that translates into either severing ties very quickly due to cost pressures or one may see the same b school graduates leaving the organisation due to lack of clarity of role and imperfect environment to work with. And then one can hear the same entrepreneur saying – ‘Oh I wish I could have done without them – so much money into the drain – my usual staff did much better work than these b school graduates .etc. !

I am sure lot of these could be avoided if the PE investors could create mechanisms to mentor the start-up entrepreneur rather then letting him working on his own. I understand the profit/ high valuation motive but I guess that is not all. A good quality PE investment would steer the company to a best in class that will not just fetch good valuations, but will rate the PE high in terms of being most sought after PE firm.

I have heard some PE firms saying this for certain of their investments – ‘This invested company is board driven’ – This is not true. When one gets into the company deeper, one may see the company getting deeper into a mess with this PE investor. Perhaps the entrepreneur has never been mentored. He was left to do as he wished with so much investment in the company. When things do not work out, the investors then force recruitment of CXO’s without an agreement with the entrepreneur that s/he would have to pass on the control to the senior professional management as soon as they are on board. Hence a “fantastic” professional CXO could become a temporary phenomenon, gets frustrated and moves on.

So what should be the solution. I guess that private equity firms have a greater role to play. They really have to draw a line between just investing to good investing. It is as follows:

a. The PE’s should create mechanisms to professionalize to the extent it needs to be professionalized by bringing in best practices. It must be examined as to what level the company needs to be professionalized , a smart risk – return trade-off.
b. Create and organisation structure and build in KPI’s for each one to have clarity of role and performance parameters.
c. Install systems, policies and procedures, delegation of powers.
d. Automate processes.
e. Get the right HR , Finance support personnel at the right time
f. Outsource as much as possible to continue to focus in business.
g. Create mentoring mechanisms for the management.
h. Create key performance indicators along the value chain and install mechanisms to monitor for sound focus on organisational performance.

All these to ensure that these companies do well not just in their respective businesses but have best practises and good governance that would help them scale up and be ready to take leap as a world class company.

I strongly feel that PE investors should be rated. The economy of the country cannot just improve by PE’s investing but by good-PE’s investing.


July 15, 2012 - Posted by | Uncategorized | , , , , ,

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