Private equity investment in real sense is a Lifecycle investment. There is an urgency to add value and show growth to the investors. There is a lot riding on successful and timely exits including ability to raise fresh funds as well as cashing in on the efforts of 5 to 7 years spent on nurturing and growing each business. A successful private equity investor has the ability to identify companies with good opportunities, improve their performance and get a profitable exit through the sale of the company.
Today apart from basic investment criteria the leading private equity firms are also expanding and refining their scope to further enhance their return on investment. Some areas that PE’s are looking to enhance and drive higher rates of return are.
Industry specific specialized PE investments
As the markets mature and deal sizes are increasing, we are finding a trend of Private equity funds becoming specialized investors .They are no longer plain vanilla equity or debt investors and are stretching themselves with higher degrees of competencies to add value for companies. Hence you find that many private equity firms are building their investment thesis around one or a few industry sectors, an approach that is yielding noticeable results, particularly in the middle market. The internal rate of return for specialized funds has outperformed the IRR for generalist funds by an average of 10 percent.
There are funds focused exclusively on the distribution and logistics industry, Real estate, Food and Beverage and Retail etc. This strategy helps in focusing and attracting investors with the right background. Working with such industry informed investors gives the PE valuable flexibility that can be instrumental in generating stellar returns. This helps the PE to differentiate themselves by virtue of how they present their portfolio company to a prospective buyer. Today’s buyers are more sophisticated and educated than ever in terms of the questions they ask and the information they want to see and not every potential buyer will view a potential asset in the same way. As sellers, private equity firms need to be prepared to tailor their value propositions to directly address each potential buyer’s interests.
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Thinking on Exit strategies at the Point of Investment
Today’s leading private equity firms don’t wait until after they’ve acquired a company to think about their eventual exit strategy. The question of a viable exit strategy is part of their diligence process for considering a potential acquisition. The key to a successful exit is having a clear understanding of the opportunity when you actually execute the deal, and then having the discipline to put your plans to work almost immediately after the acquisition.
You will find that on most occasions when a seller is talking to a private equity firm about a potential buying opportunity, they’re already thinking about the exit strategy well before they write the cheque. They’re asking questions like: what can I do with this asset? How can it grow? How can it be made attractive to someone else to buy it? .The most successful exits are the result of a well-thought out and constructed value creation programme that starts at the due diligence stage.
Long-term Strategy and Advantage of Network within Portfolio Companies
Private equity firms are also increasingly using their investments within their portfolio companies and their networks to add value to the new investments. For example an Investment in a Food and Beverage company can be backed by a Investment in a facilities management company whose existing network and contracts can be leveraged by the Food and Beverage company to gain access to great locations in Food courts and corporate being serviced by the Facilities management investee company.
Marketing and PR
Private equity firms are recognizing the importance of investing in public relations and brand building communications strategies to ensure their firms are visible – with the right messaging – to potential target acquisitions, partners, deal advisors and buyers. It is important for today’s private equity firms to take a more proactive stance in building awareness about their firm at all stages of the investment lifecycle, to attract the right investors, identify the right targets for investment and build the firm’s brand and credibility in an increasingly competitive marketplace. With the relaxed regulations regarding solicitation of investors and the ongoing advance of digital marketing, private equity firms have little choice but to adopt a proactive communications and brand building approach – or risk the chance of being lost or overlooked. Most firms are also using outbound channels, such as phone calls, e-marketing and face-to-face meetings to raise awareness and grow their business. However, the power of inbound marketing channels should not be overlooked. From blog posts to video to social networks, any tools that make it easier to find a firm online and get a sense of their reputation can create a powerful flow of relevant relationships that can be converted into deals.
Investment in Technology
The earlier long drawn process of excel spreadsheet or cumbersome internally database solutions are being replaced by Business intelligence software. PE‘s are investing in Technology and leveraging the information and data they have to take informed decisions. More than just financial spreadsheets the evaluation is also around adopting sophisticated technology solutions to manage the entire life-cycle of their portfolios. Customer relationship management (CRM) software is also used to help private equity firms manage their network of buyers, advisors, sellers and agents more effectively. Data mining tools are gaining attention as a means for firms to proactively source deals and identify potential buyers when they are ready to exit. Virtual data rooms are an integral part of any firm’s ability to showcase portfolio companies it is preparing to exit.
To Sum Up Private equity (PE) exits in India grew by more than 60% in value terms to $15.7 billion in 2017, making it the best year for PE exits, according to Bain and Co.’s India Private Equity Report 2018. Public markets emerged as the preferred route for exits in 2017, with over 50% coming from there, (including initial public offerings).Big-ticket deals such as Qatar Foundation Endowment’s exit from Bharti Airtel Ltd in an open market transaction for $1.48 billion; Tiger Global’s secondary sale of Flipkart for $800 million; and Apax Partners exiting Global Logic for $780 million powered the exit momentum in 2017.For private equity firms in the market to sell portfolio assets, the future looks pretty bright. The lending environment is at a near peak level and equity markets are trading near all-time highs. With excess capital sitting on the sidelines and dozens of private equity investments from years awaiting exits, competition for strong performing companies is bound to increase .Private equity firms have raised the bar on the level of scrutiny and predictability of achieving the exits they need to meet their own investment objectives. Accordingly, it’s wise to expect them to apply that same level of preparation, scrutiny and seamless execution in presenting their portfolio companies and answering the in-depth questions from prospective buyers for a successful exit.
Further impetus to the PE exits and strong interest in Indian markets was given by the US giant Walmart Inc buying 77 per cent stake in Flipkart for about USD 16 billion (Rs 1.05 lakh crore), it’s the biggest deal in India and will give the retailer access to Indian e-commerce market .The deal, wherein co-founders and Japan’s Softbank Corp Group are exiting, values Flipkart at USD 20.8 billion. It is the biggest M&A deal in India this year.