SME Connect Private Equity

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“ICICI Bank presents SME Connect”, aims to partner in the growth of SMEs and Emerging Corporates by bringing to them some of the new avenues of growth and empowering them with information to compete in global arenas. Through fifteen city editions every Friday, SME Connect reaches readers across the country and has been very well-received. Following the feature on Private Equity, the following questions were posted to our expert, which have been answered in detail below.

  Q. I am an auto parts trader and have a turnover of INR 25 million. Can I avail of PE for my working capital requirements?  
A: Trading typically has very little value addition and very low entry barriers. PEs therefore tend to avoid investing into pure trading concerns unless there are certain specialties which are difficult to duplicate. In case you have a significant market share in the product you are trading or any special marketing rights, some investors may find it an interesting opportunity.
  Q. What are the special rights which PE investors ask for?  
A: Major rights which the investors ask for are:
  • Monitoring rights – the investor asks for quarterly financial statements and status reports on projects, etc.
  • Representation on the board and veto rights in decisions which have material implications for the company.
  • Capital protection rights like "tag along" wherein the investor gets the right to sell proportionate holding in case the promoters are selling their shares, right of first offer in case of further rounds of fund raising, etc.
  PE investment generally happens in unlisted companies, so the investor has limited options in case the performance is not as per the expectations or the company deviates from agreed plans. In that context, these rights are aimed at protecting investor's interest and ensuring that they are consulted in all key decisions which affect company's operations. Such privileges generally expire once the company gets listed.  
  Q. What are the exit routes for PE?
A: The most preferred exit route is IPO. Once the company gets listed, the PE investors offload their holding into the market at suitable time intervals.
Other modes of exit are secondary sale to another fund or a strategic investor, buy-back by the promoters, buy-back by the company.
  Q. What is the best business for PE investment?  
  A: There are no "formula" businesses for attracting PE investment. PE is a sector agnostic source of fund. As long as the basics like strength of business model, competitive advantage, strong growth story, etc. are in place, investment is possible.
  Q. What is better – PE or IPO?  

A: Both sources have their own advantages and limitations. IPO is generally not an option for companies below a certain size of operations. PE however has a wider application.

Secondly, for an SME, PE investors can also add value in terms of organisational, technical and financial expertise, which may not be the case with IPO.

I am not aware of your size of operations, but for an SME in general, I would advise PE over IPO.