With millions of dollars in their kitty, private equity (PE) companies have been assiduously wooing mid-size Indian companies in recent times. But for every deal that one reads about, there are 10 where one of the suitors ends up jilting the other.

Why do these deals fail? Here are six reasons that entrepreneurs and PE firms list:

Stumbling over stake size — “Why are Indian entrepreneurs so obsessed with owning majority stake,” asks ApnaCircle founder and CEO Mr Yogesh Bansal. “Even a Bill Gates owns just four per cent stake in Microsoft. We need to come out of the notion of keeping 51 per cent stake,” he says.

Mr Bansal practices what he preaches and proudly says that in his firm none of the promoters or investors has more than 10 per cent stake. But in the Indian entrepreneurial landscape, he is the exception rather than the rule.

Mr Kannan Sitaram, Chief Operating Partner, India Equity Partners, points out that although their 49 per cent share might in two years time actually net them larger gains than their 100 per cent stake today, Indian entrepreneurs are still wary about diluting their stakes beyond a point. “It's a mindset issue. And this is why many a deal never takes off,” he says.

“There is a vulnerability issue when you dilute stake,” defends Mr Harsh Mariwala, Chairman and Managing Director of Marico Ltd. But, he says, if capital infusion is needed, then agreements and clauses can be built in to work around the issue.

Valuation worries — Promoters assume that that the current rate of growth and profitability will continue and set unrealistic valuations, says Mr Sitaram. Or, they look at other deals and begin making comparisons. For instance, he says, soon after the Paras deal, the feeling gained ground among several mid-size FMCG companies that if Paras could get X times their sales level, why not them. “What they don't realize is that a Paras had a greater brand value than them. There are a lot of factors to valuations. And an apple versus oranges comparison does not work,” says Mr Sitaram.

The IPO itch — “We sometimes lose deals to IPOs,” says Mr Keshav Misra, Head of Capital Allocation and Investment Management at Baring India. He describes how even as talks are progressing about private equity infusion, the promoter suddenly has a change of mind and prefers to go the market route.

Called to Account — Corporate governance issues often lead to deals coming a cropper. “You will be surprised how averse some companies are to changing their accounting practices,” says Mr Sitaram. For private equity players bringing funds from the US and other markets, transparency in accounts and compliance is a key requirement.

The risk factor — Often there is disagreement between the promoter and the private equity partner on the strategic focus of the company. “Sometimes, we advise the promoter to step things up, move out of some areas, and invest in others, and he might be averse to doing that. That's when talks falter,” says Mr Sitaram. It could be anything — disagreement about the people being brought in, or on the need to invest in branding and so on.

The need for capital evaporates — Very often a company approaches a private equity fund when it needs capital for a specific purpose – it could be an acquisition, capacity expansion, investment in new products – anything.

But even as the talks are on, the company may suddenly decide against the project. “We have faced that situation a couple of times,” says Mr Misra ruefully.

In sum, this is a classical optimisation problem in which there are often too many constraints. And as any linear programmer will tell you, optimal solutions that satisfy all constraints are very hard to come by.

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