In his letter to the Board and employees of Coffee Day Enterprises Ltd (CDE), which circulated soon after he went missing last Monday, Chairman & Managing Director V G Siddhartha said, he could not take any more pressure from one of the private equity (PE) partners forcing him to buy back shares.
In an interview with BusinessLine , P M Devaiah, Partner & Group General Counsel at Everstone Capital Advisors says blaming one’s PE investor is a case of misplaced witch hunting.
Regulators, lenders, government and PE investors have emerged as the villains on the block by a unilateral proclamation of the citizens... I think this is unfortunate... The PEs, I am sure, have negotiated and inked the terms of engagement in mutual consultation with advice from their counsels.
To complain of negotiated terms post facto is like an inefficient carpenter blaming his tools. No one forced CDE to seek PE funding.
At what point in the investment lifecycle does a PE firm starts to pressure an entrepreneur to start buying back shares of the company?
This bogey of PE investors’ pressure is a case of witch hunting by a few entrepreneurs... PE funds have a limited time horizon to return investments to their investors and cannot hold on to a portfolio in perpetuity. As a result, most PE investments will have a mutually agreed ‘exit waterfall’, that is, a pre-agreed way a PE investor could sell its investment in a time bound manner. Promoter buyback is one among the various such exit mechanisms and entrepreneurs have the freedom not to agree to such terms.
What is the code of conduct followed by PE firms to recover their investment when a company they have invested in is in the doldrums?
Unlike a loan, equity is not recovered but sold. The terms of investment by a PE firm and a recipient company is preceded by protracted due diligence and negotiations that sometimes run into months/years. When a company is in a bad shape, some are rehabilitated, some undergo restructuring, some PE firms do further rounds of investments where there is potential for growth and also write off investments if the business has genuinely not performed. In some situations, when the bad situation is due to mismanagement or fraud, then the law takes its course.
... in this case...
By Siddhartha’s own admission in his letter to the board, dated July 27, 2019, his assets outweigh his liabilities. Private Equity is one of the most compliant capital pooling and deployment businesses which bring about global best practices to companies. Intense anti-money laundering compliances, anti-bribery codes, environmental and social practices, etc., are followed by institutional investors.
Siddhartha was a seasoned businessman with best-in-class resources at his disposal. Economic downturn affects everyone. Why should PE firms be blamed for the unintended consequences of his entrepreneurship?