The economic slowdown has taken its toll on the growth of medium-sized businesses. The pace at which a business transitioned from small to medium or medium to large in 2003-08 was quite rapid. That transitioning is taking much longer now and like a snake-and-ladder situation, you find companies slipping, says C. Venkat Subramanyam.
Venkat should know. As Founder-Director of the Chennai-headquartered Veda Corporate Advisors, he is an investment banker representing entrepreneurs looking to sell equity and raise funds from venture capital (VC) and private equity (PE) players.
Being active in the growth capital segment, Veda advices entrepreneurs, from formulating the business plan to seeing them through the fund raising.
The faster scaling during 2003-08 happened because of the overall economic growth and availability of capital, which, in turn, helped in companies buying out others in the same space.
According to Venkat, even in the present situation, there are companies that have grown rapidly, either because a particular sector is doing well or due to the availability of capital. “Amongst this chaos and turbulence, you will find a few players emerging stronger and doing better,” he says.
Healthcare shines
One sector that stands out and is delivering growth and returns is healthcare. It has caught the fancy of VC and PE investors. Apart from investments in single- and multi-specialty healthcare facilities, there is a lot of action in healthcare ancillaries in areas such as medical technology devices, equipment and consumables.
Other sectors that are seeing investment action and are growing include consumer, food and agri-business. There is growth in the financial services space, but that is getting offset by increasing regulatory issues and cost of funds.
A combination of factors, says Venkat, is helping the healthcare sector. One, individuals cannot afford to trim healthcare spending. Two, the facilities provided by the government are inadequate to meet the growing needs. Three, entrepreneurs are tapping into opportunities in diagnostics as well as specialty centres. Companies active in the sector have shown that scaling up is possible provided the strategy and business model are right.
However, with a lot of investor attention focussed on healthcare, there is the possibility that a few below-average businesses may get funded. The repercussions of this, says Venkat, will be known only four-five years hence, when these investments start maturing and the investors look to exit.
Return expectations
Venkat also draws attention to the fact that PE investment does not come cheap. The return expectations of investors are high. And, in healthcare, the burden of this will be passed on to the patients. “There is no doubt about it. We have seen this in microfinance. I only hope that there is no repetition of what happened. PE in microfinance did a world of good initially,” he says.
Thanks to capital availability, microfinance institutions were able to expand. But the pressure of PE meant they started focussing on returns. How healthcare entrepreneurs balance the need to satisfy their investors with an ethical approach towards their patients, will be a challenge.
What does he advise entrepreneurs who approach him for help in raising funds? Venkat says in today’s market, when money is not easily available, investors are becoming selective in their investments. When the bars have been raised, it is only those companies that have decent size and profitability and growth or those with exceptional growth potential, but not necessarily supported by numbers, that are getting funded.
“The leap of faith is not happening easily. In a good market, the leap of faith happens,” Venkat says. Investors have become discerning, some by choice and some out of compulsion. “Our advice to entrepreneurs is this is not the best time to raise equity because valuations are down in most sectors. However, if you get your capital raise now and if you prepare yourself for the next opportunity, you might be the first off the block when the market revives,” he adds.
It’s a tough phase and entrepreneurs need to wait and watch, says Venkat, drawing a cricketing analogy.
Play out the session and do not give up your wicket. Then start focussing on the scoring rate once conditions improve, he says.
He adds that those entrepreneurs who are well placed are in no hurry. They are also evaluating the pros and cons.
The ones who require money for liquidity will never get it from PE, as PE is not an answer for liquidity issues. The ones who aspire for growth but do not have the numbers to support that growth will not get it by and large.
Those who have growth, but are stuck in sectors that are perceived as lacklustre will have to face the consequences of being part of a bunch.
The ones who are performing well or are showing average performance in a good industry will get capital. That leaves a small band of companies that can raise capital, says Venkat, summing up the current situation.