Speed is the buzzword as the popularity of F1 races in India would indicate. Private equity investing in India has also picked up speed. The number of private equity transactions in India has grown from 73 deals in 2004 to 380 deals in 2010. The number of funds has grown exponentially during this period, giving entrepreneurs more options. The universe of companies looking for funding has also grown driving deal volumes higher. This growth has led to more deals being executed at a faster pace.

Faster is not better

Unfortunately, speed sometimes comes at the cost of comprehensive diligence, understanding the entrepreneur mind-set, fund objectives and relationship building. If the speed of a transaction can be measured by the length of expected investment holding period divided by the time spent on investment evaluation, a higher ratio magnifies the potential for expectations mismatch. As a rule of thumb, faster the transaction, higher the probability of differences.

There can be exceptions driven from factors such as prior relationships that may justify a higher speed. However, ideally, investments in private companies which are illiquid and have a long holding period, need longer evaluation and due diligence.

Today, for a significant minority stake transaction in a private company, the typical expected holding period ranges from 36 to 60 months while the typical investment evaluation period ranges from 6 to 12 months. It is during the investment evaluation period that the basis of ongoing relationship is established, expectations are shared and set.

Funds need focus

Private equity investments range from pure financial investments to operating value-add models; from a small holding to a controlling stake. A private equity fund that articulates its strategy, involvement and value-proposition is more likely to attract the right companies to its portfolio.

In the current environment, an opportunistic investment strategy of one-size fits-all will be challenged and is difficult to execute. Realising this, funds are starting to segment the market and carve out their own niches in the private equity space. A focussed approach also helps them to prove to entrepreneurs in a specific segment that their focus and understanding of a space or type of transaction will help them add value as stake-holders. Funds would be well served to invest in companies at the right speed ensuring that there is no expectation mismatch. To the extent the funds are focused on value-add, they will have to build up the appropriate capabilities to help deliver on this promise.

The entrepreneur's side

It is equally important for entrepreneurs to clearly define and communicate their requirements and not try to pitch what they think the funds may be interested in hearing. The entrepreneur's requirements could be only financing support with minimal fund involvement, or a more involved model with help at the Board level for strategic guidance and corporate governance or an even more involved model wherein a fund is expected to add value to scale-up the business. Clarity on requirements, involvement expected and clear communication of the same will help businesses attract investment from funds best suited to provide the business what it needs. While it may help to obtain funding quicker and drive the transaction faster so that the business can start executing growth plans, taking time to understand the funds and choose the appropriate one is worth taking the time to do.

Both the entrepreneur and fund need to understand the expected corporate governance-related changes. The fund must make its expectations on this topic crystal clear. The entrepreneur should take the opportunity to build a robust governance process and make his/her views clear. Inking a deal with a difference on governance viewpoint can be a ticking time bomb that has more time to burst if the transaction is done at a high speed.

Competitive pressures and the thrill of speed create the temptation for a speedier transaction. Given the sheer volume of investments being made, there are likely to be some accidents. Driving at the right speed, articulating and communicating expectations can give the entrepreneurs and funds a smoother ride. Don't invest in haste and repent at leisure.

(The author is Managing Partner, ASK Pravi Capital Advisors Private Ltd)

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