In September 2008, one of the stores of kidswear brand, Lilliput, in Vashi on the outskirts of Mumbai, had a rather unusual walk-in. It was a day when Sanjeev Narula, proprietor of Lilliput, happened to be at the Vashi store. Narula recounts how the visitor advised him to change the display of clothes according to various themes and colours. He also suggested that Narula introduce an affordable range of clothing. This perhaps wasn’t the first time Narula has received such advice of the unsolicited kind. On this occasion, however, he had little choice but to take it. The visitor to his store was one Kishore Biyani, Founder of the Future Group, and creator of such successful retailing brands as Pantaloon and Big Bazaar.
Now Biyani isn’t known for gallivanting around town, striding into random stores and proffering counsel (although he’s known to hang about his own retail formats on weekends, keenly taking in consumer behaviour). Biyani had some solid reasons for visiting the Lilliput store, and more than a few of them are strategic. Indivision Capital, a private equity (PE) firm that’s a part of the Future Group, had picked up a stake in Narula’s firm; Biyani was doing his bit to ensure a return on that investment.
What PEs bring to the table (in downturn)
|Access to bank finance as PE-backed firms are more credit-worthy|
|Access to new customers or to other investee companies of the PE fund|
|Keep a tight control on various costs|
|Professionalise company management|
Not too many promoters of the profile of Biyani would go to such an extent to back their PE ventures, but the message in this tale is that PE firms are pulling out all stops to get closer to their investee companies. And there’s ample reason for that. Along with investment banks, insurance firms and hedge funds, another class of investors that took a battering in the wake of the sub-prime crisis in the US is PE. That’s because many of the companies they’ve invested in—often on the back of huge leverage—have little cash coming out of them, and more than a few are at the doorstep of bankruptcy.
Back home, too, the PE brigade stands the risk of portfolio companies going under—and taking along with them precious PE capital—courtesy of the economic downturn. One way to attempt to keep these companies afloat is by the PE managers themselves lending a helping hand to sputtering Indian businesses. For promoters, a cost-effective and simpler option to calling in the management consultants or investment bankers is to step into their own backyard and tap on the shoulders of the investors who’ve bought into their companies.
Private equity by nature is—or is at least perceived to be—a pure financial transaction, with the investing firm picking up a stake by putting cash on the table. But it doesn’t have to be that way—not when economic growth is slowing down, demand is softening and earnings are under pressure. That’s when the pedigree and the wealth of experience of the PE player become vital, allowing him to get involved in strategic evaluations at the portfolio company. Decisions involving cost reductions, vendor development, disinvestments and cost-effective sourcing are increasingly being blessed—and in a few cases even dictated—by the PE partners.
In recent quarters, senior team members of PEfunds have been known to park themselves in their investee company offices, run marathon meetings to take stock of the financial position and devise strategies to ease the pain of the economic slowdown. For instance, Nitin Deshmukh, CEO, Kotak Private Equity, had started screening the cash flows of his 15 portfolio companies as early as in April 2008. It wasn’t long before cost control assumed more importance. The first sign of stress became visible when banks refused to disburse sanctioned loans and customers who had paid up 75 per cent of the price of goods booked refused to pick up the inventory. Satish Mandhana, Executive Director, IDFC Private Equity, recounts how foreign banks had withdrawn credit lines to some of their portfolio companies and the immediate challenge for his team was to secure a line of credit from the domestic banks.