The Hindu Business Line : Small, mid-cap cos a big draw for pvt equity funds

Unlike in the developed markets where PE firms look to pick up majority stake in mature businesses through the buyout route, in India, PE companies seem to be chasing growth capital through minority stake holding in mid-cap firms having bankable business models.

The first half of 2006 saw investments worth $3.5 billion through PE funds (as against $2.3 billion during the whole of 2005), with a substantial chunk of it going into mid-caps, most of which are unlisted entities and regional players.

For instance, Helion Venture Partners, an India-focused tech fund invested $2.2 million in Bangalore-based JiGrahak Mobility Solutions. Kleiner, Perkins, Caufield & Buyers picked up a 10 per cent stake in the distillery equipment maker Praj Industries while IntelCapital picked up stake in Chennai-based digital media firm Real Image. Maya Entertainment, Mobiapps and Persistent Systems are other mid-caps that got PE funding earlier, while Mauj Telecom, which operates in the mobile value-added services space, received $10 million in funding led by WestBridge Capital Partners.

Ludhiana-based food company Cremica, a food company active in the Northern region, is reportedly on the radar of Goldman Sachs' PE fund while the Carlyle Growth Fund recently invested $20 million in Ahmedabad-based Claris Lifesciences. Morgan Stanley Real Estate invested in Mantri Developers while PE investor Actis invested $15.5 million to fund the expansion of Gujarat-based hospital group Add Life Medical Institute Ltd.

Mr Pankaj Karna, Partner and Head of M&A Advisory of Grant Thornton, said, "Private equity looks to make investments in family businesses, where it sees value for itself, specially in smaller companies where the model is scalable at a lower cost."

For instance, in the Helion-JiGrahak deal, Helion has said its interest in the firm was driven by the fact that JiGrahak was an early mover in the mobile commerce space and its NGPay solution was one of the few end-to-end mobile commerce solutions available today. The rush to fund mid-segment enterprises has prompted the launch of specialised funds as well. For instance, Switzerland-based BTS Investment Advisors has launched BTS India Private Equity Fund — a $80-million fund that would invest in mid-size enterprises seeking expansion capital.

According to Mr Sanjiv Kaul, Managing Director, ChrysCapital, "Family businesses choose private equity for growth not only because it gives them access to capital, but because as an asset class the firm also helps them to compensate for professionalism and strategic bandwidth. It offers them professional competence in areas such as board functions, strategy for growth among others. In India there is an excellent alignment developing between PE firms and small businesses."

Though a handful of deals have fallen through due to reluctance of promoters to dilute equity, this resistance is decreasing. Mr Karna said: "It's true that earlier several family businesses were nervous about diluting their equity in the business. But today, the market environment is such that you need to scale up, for which you need access to capital. If you keep 100 per cent today, in five years the value may be much lower than if you offload a part of it. They are choosing the PE route at the back of various demonstrated successes."

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