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Private equity funding is increasing in India, as investors are eyeing long term benefits. Jyoti Prakash Gadia, MD of Resurgent India discusses how retailers should prepare their company to attract PE funding!  

 

Sharmila Das (SD): What are the parameters that a private equity firm follows to select a retail business enterprise for funding?  Also tell us what are the parameters that a retail business enterprise should follow to select a PE funding company?

Jyoti Prakash Gadia (JPG): Parameters for the Investor in identifying targets:

  • To possess a strong management team  
  • A robust business model
  • To establish strong links across the supply chain
  • Following a test-refine-growth model by shedding irrational exuberance  
  • Resource planning for scalability that would include human resource and financial planning
  • Over emphasising on ‘the location’ is unnecessary. As any location in India can be successful provided the retailer understands the psyche of the target audience and their specific requirement in the target location.

Parameters for the company in selecting right funds:

Given the fact that retailing is not the top target sectors for private equity funds unless they have a global portfolio and focus on retail, the key would be to not be selective. Almost all private equity funds which are sector agnostic, bring in financial strength and corporate governance; value addition in the form of strategic benefits which are opportunistic than planned before investment. So the key becomes the investor’s understanding of the business model and meeting valuation expectations.

The company should look into the past investment track record of the PE funds, the performance and possible synergies with their investee companies.

Investment philosophies, tenure of the fund, limited partners behind the fund etc are some of the parameters a company should definitely look into before accepting funds. 

  

SD: How PE funding companies perceive their business opportunity in Indian retail.

JPG:  Over the past decade, PE industry had mixed stories both from the multi-baggers

and the bankruptcies. Overall, the sentiment is low towards retail industry. This is due to the lack of clarity on the business model which is still considered a nascent industry.

 

SD: How should a retailer prepare their business plan to attract PE funding?

JPG: It’s very specific to the nature of retail that the investor is planning to venture into – discount, departmental, niche, lifestyle, etc. More than the numbers, the business plan needs to provide sufficient comfort to the ‘Parameters that an investor would look at while investing in retail’ (mentioned above)

 

SD: How PE funding helps a retail brand to strengthen their business operation? What benefits PE funding brings for a retailer and to them also?

JPG: As mentioned earlier, the only significant benefit is providing financial strength. Corporate governance is value- add, but still PE players are trying to grapple with issues on this in retail industry. Apart from this, some of the other important value add includes – business planning, second level of check on rational growth, opportunistic strategic growth options and business synergies with other portfolio companies of the PE.

 

SD: How PE backed company is able to earn higher profits than a non- PE backed retail business enterprise? In this respect what are the benefits a PE funding company receive?

JPG: In terms of profit margin, the points mentioned above on PE value add to the business does help in this respect. But the key benefit is keeping the retailer away from a debt trap which can be really terrible for retail ventures in adverse economic times. Since PE backed companies generally have a sound MIS in place, this helps them in planning strategically, reduce expenses, effective inventory management which ultimately leads to operational efficiency and better margins.

 

SD: What are the efforts that a PE investor put to prepare the company for IPO, both in terms of their industry relationship and business growth? Please explain.

JPG: PE investors are better networked to the financial world. They have better sense of market dynamics than the promoter. They provide help in better marketing of the IPO, FII and anchor investors.

 

SD: How do you evaluate the time period that a retail enterprise requires for PE funding support till it goes for IPO. Can it be an unlimited period solely depending on the discretion of the company?

JPG: This time period is generally decided in the business plan itself. Whenever any PE investors enter into the company exit route, it also include time period. But this plan is under constant evaluation. Depending upon the market dynamics, sentiment prevailing, future forecasts, tenure of the fund, etc are the criteria when the company and PE decide to unlock the value. If fund need to exists and value/ time is not correct then it may even look for the sale of the stakes to other funds also.

 

SD: What is the role of Resurgent India in providing financial and management services to Indian Retail?

JPG: Resurgent India is a full service investment bank and consulting house with services offering across capital syndication (debt, equity or mezz), restructuring (in the form of M&A or financial restructuring), business advisory (business plan and strategy formulation) and transaction advisory (valuation, due diligence and any other allied service). We have worked with a large number of retail clients starting from formulation of business plan, arranging for seed funding, growth capital in forms of debt and equity, business growth strategy formulation and finally to listing on capital markets. At the same time, our Group Company, Ginni Systems Limited with more than 5,000+ retail software installation provides us with great understanding of the business, client network and makes our offering to this industry wholesome and virtually one-stop.

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