Emerging Entrepreneurs

‘A house not in order, leads to funding disorder’

Sangeetha Chengappa | Updated on July 23, 2018 Published on July 23, 2018

PM Devaiah, Partner and Group General Counsel, Everstone Capital   -  SOMASHEKAR GRN

Companies seeking funding should have in place compliance tools to address issues much in advance, says Devaiah of Everstone

Debt investors such as banks and non-banking financial institutions on the one hand and equity investors like private equity (PE) and venture capital (VC) firms on the other, don’t view their investment thesis through the same prism. While debt is based on the bedrock of security by a going concern, equity investors are unsecured, exposed to equity risk and consequently more involved and participative during the course of pre-investment analysis and thereafter. Outlining what companies need to do before seeking PE funding, PM Devaiah, Partner & Group General Counsel, Everstone Capital Advisors, said, “a house not in order leads to a funding dilemma.” Edited excerpts:

What is the best way to approach a potential PE investor – directly or through an advisor?

There is no right or wrong answer. A direct pitch may be made but, at times, it may turn out to be an inefficient approach. Advisors and placement agents can guide a company’s funding plan by preparing them to be funding grade and help them in various housekeeping issues that investors ordinarily expect to see. For instance, we receive a lot of proposals that are small that VC investors should be looking at and not a PE investor like us. Quite often, companies end up approaching investors to prepare for funding and are never fully prepared to receive funding, which in turn prolongs the engagement time-cycle. It is best to seek the services of a professional who will act as an intermediary between the investor and the company to prepare them to expedite an investment.

At what stage in a company’s life-cycle does a PE investor typically step in?

Nothing is cast in stone. Investors have their own investing discipline based on their own constitution and investing appetite. Our preference is to do buy-outs where we do hands on management and grow the companies. Traditionally, PE investors step in when the company is at a sustainable growth stage and not at the early risk stage where VCs typically like to come in. Our sweet spot, for instance is a ticket size of $50-150 million which can go up to $500 million for large attractive buy-outs. If an acquisition is a “bolt-on’’ to an existing investment, then strategic fitment or synergy matters and not the size.

How long does it take for a PE investment to come through for a company?

For an engagement to translate into an investment, the process could take three months to a year depending on the preparedness of the company among other commercial and regulatory reasons. Of the various clean-up measures, one of the most time-consuming exercises as pre-investment condition is getting ‘change of control’ no objection certificates. Investors typically like to see these NOCs as a precondition as they would not want to stare at a violation that triggers as a consequence of their investment. These NOCs will be required from large suppliers, lenders and other customers that have contracted to deal with the existing management and like to have a say when the management control changes hands. Planning in advance for such consents can go a long way to have an early deal closure with incoming investors.

How can a company prepare itself to make sure that the pre-investment due diligence time is not a long drawn out affair?

A company can pre-empt needless diligence delays by putting in place a systematic data room covering its business, licences, statutory records, material contracts, financing documents among other customary details that a standard diligence typically seeks to investigate. Funding can get delayed or even aborted if companies are not in compliance with anti-bribery laws, avoidance of conflict of interests, to name a few. The prevention of corrupt practices has taken a main stage in the world of international financing, consequently institutional investors expect companies to be in compliance with US Foreign Corrupt Practices Act and UK’s Bribery Act. Companies seeking funding should have in place compliance tools to address these issues much in advance of an equity raise conversation rather than clobber something together in a hurry when the conversation has begun.

What are the other compliances a company must have in place before seeking investment?

In today’s world, compliance is a holy grail. Since we raise money from Limited Partners globally, these investors mandate companies to have a robust ESG (Environmental, Social Justice and Governance) compliance programme in place. Standard ESG guidelines are necessarily mandated as a ‘must have’ for investors deploying capital. Socially responsible investing practices, anti-money laundering checks, environmental protection, clean money and diversity are practices a company should adopt early to be a funding-ready entity.

Most often, companies have unattended regulatory violations, inadequate filings, and inadvertent breaches. Equity investors while investing, track these shortcomings and seek clean up either as a condition precedent or a condition subsequent to capital deployment. Identifying these issues and unleashing a curative compliance programme through reliable experts to put the house in order is the way to go about it.

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Published on July 23, 2018
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