An equitable rise sees PE investors add greater value to companies

About three to four years ago, when the private equity/venture capital (PE/VC) industry was in an embryonic stage in India, PE firms were known as financial investors. The companies that wanted higher investments or didn’t have a superb working background considered PE firms as another bank where promoters could pledge their stake.

But now, with the beginning of another decade, the concept on PE/VC firms has changed a lot. PE investors have proved they are not merely investors but partners who could bring their portfolio companies to a much competitive level — on par with top-level players in each industry. Much improved balance sheets are the examples for the metamorphosis.

According to a recent market research data, PE-backed companies have shown a 31.5 per cent growth in profit after tax (PAT), significantly higher than the non-PE-backed ones (22 per cent), Nifty companies (23 per cent), Sensex (21 per cent) and the CNX Midcap (22 per cent). PE-backed firms have also reported better growth in sales, wages, exports and research & development investment.

Anand Sudarshan, CEO, Manipal Education, said: “We never treated our PE investor as a minority shareholder. Our objective was to build up a successful global educational group by joining hands.”

This is reflected in the company’s performance, where the company has achieved 400 per cent growth in revenue and 550 per cent rise

in PAT in 3 years between September 2006 and September 2009, after investment by IDFC Private Equity. Its revenue exceeded Rs 1,000 crore, from Rs 250 crore 4 years back. IDFC’s stake of 8 per cent in 2006 came down to about 5 per cent following the group’s stake dilution to more PE firms.

Private Equity firms normally appoint a partner in an invested company to bring better corporate governance and implement growth strategies.

IDFC Private Equity Managing Director Raja Parthasarathy said: “In the case of Manipal Education, our support to the company has been in the areas of providing advice on both organic and inorganic growth, bringing on board top management, assisting them with introduction to global partners, improving the company’s monthly Management Information System (MIS) and facilitating the entry of two new private equity firms.”

In February last year, PremjiInvest, the PE fund floated by Azim Premji, invested about Rs 200 crore in Manipal Group. Catamaran Investments, promoted by N R Narayana Murthy also made a small investment in Manipal last year. IDFC PE brought on board the top management, including CEO Anand Sudarshan.

Sudarshan said: “The IDFC team helped us a lot to create a global brand by entering into alliances with renowned global educational groups in the areas of vocational education. The JV agreement with City & Guilds of the UK was signed with IDFC’s support and advice. Apart from the creating alliances, IDFC helped in our M&A activities. From finding real targets, evaluating the management capability, due diligence and negotiations to concluding the deals, IDFC was helpful and supportive to us.”

The Manipal Educational and Medical Group is run by Ramdas Pai and his son Ranjan Pai. Over the past few years, the company’s core distance education business has expanded from 50,000 students to over 200,000 students and the company’s footprint has become truly global with operations have gone beyond India, to Malaysia, the Caribbean, Dubai, Nepal and Singapore.

Parthasarathy adds: “We introduced a senior advisor to the group who has been working closely with the promoters on issues commonly faced in family-owned businesses. For a smooth ride, major decisions are discussed and debated at quarterly board meetings and more frequent business review meetings. Also, any investment decision is evaluated and analysed at the investment committee level before being taken to the board for approval.”

The group’s education network now comprises two universities, 11 campuses, 24 professional colleges and 300,000 alumni.

According to a report titled ‘Private Equity Impact’, by Venture Intelligence, during 2010-11, publicly-listed PE-backed companies reported a compounded annual growth rate of 25 per cent in sales over 2000-2010, compared to 15.1 per cent for listed firms not backed by PE funds, 17.9 per cent for Nifty companies, 19.2 per cent for Sensex companies and 15.3 per cent for CNX Midcap companies.

If IDFC helped Manipal grow, another investment, in Moser Baer, helped the promoters survive without being washed away in 2009 — a crucial year for renewable energy companies across the globe.

Parthasarathy said: “As far as Moser Baer is concerned, our focus was to reduce cash loss as much as possible. The 2008-2010 period was a difficult time for the solar energy industry, as financing for large solar projects had dried up due to credit crisis. many companies working in the sector had gone bankrupt.”

Among the strategies IDFC implemented was shifting the company’s focus to individual household level, away from setting up large solar farms, though manufacturing at the household level was a very small portion of the total business. Besides, the PE investor ensured transparency in transactions across various group firms. “We implemented a related party transactions committee to approve the transactions like sale of solar panels to sister concerns and checked whether the deals were done on par with the market prices. We have received full support from the management on our initiatives,” he added.