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Small stakes rule in PE game

Is it emotional attachment to one’s work or strong family ties? Whatever the reason, Indian entrepreneurs are reluctant to part with majority stakes while raising private equity.

business Updated: Aug 07, 2009 21:35 IST
Devraj Uchil

Is it emotional attachment to one’s work or strong family ties? Whatever the reason, Indian entrepreneurs are reluctant to part with majority stakes while raising private equity. Only 4 per cent of deals signed during 2005 to June 2009 saw PE funds opt for majority stakes in Indian companies, against the global average of around 20 per cent.

Most industry players and fund houses find the mindset of entrepreneurs not conducive to buyouts. Indian entrepreneurs want to take their companies public and remain at the centre of activity. Of the total 1,239 deals during 2005 to first half of 2009, only 48 were controlling stake deals.

“In developed nations, promoters build their company to sell it off to highest bidder and move on to build another. They are not as emotionally attached to their companies as Indian entrepreneurs are,” said Jagannadham Thunuguntla, Equity Head, SMC Capitals.

“In a case, where a promoter is refusing to let go despite a PE fund having controlling stake, the situation could get unsavoury. This is not good for both the parties,” said senior executive at a PE fund on condition of anonymity.

Thunuguntla cited lack of quality talent as another reason. “This might be preventing PE investors from taking controlling stakes wherein they have to manage the companies after taking over,” he said.

In India, most corporates are family-oriented unlike in the western part of the world in which first generation entrepreneurs are behind many startups and growth companies.

“Alignment of interest is another issue,” said Rajesh Singhal, managing partner, PE, at Milestone Fund. A company becomes profitable when interests of entrepreneur and the PE fund are aligned. If the company has been bought out, the promoter has no incentive to improve the company.