Private equity and microfinance

Inspite of all the hype around the advent of big ticket private equity companies and reforms of our banking system, this unfortunate and invisible apartheid is something that is faced everyday by probably every budding entrepreneur of this country unless otherwise s/he is someone from one of the big ticket B-schools or has worked in one of the top five consulting companies of the world. While private equity broadly consists of venture capital, complete buy-outs, special situation and merchant banking, venture capitalism is essentially taking a backseat and is being relegated to oblivion by private funding to top notch companies and midcap companies with proven track record. Let’s take the example of ICICI Venture. Its portfolio consists of who’s who of India Inc.’s emerging companies like Biocon, Centurian Bank of Punjab, Crossword, Deccan Aviation, Karvy Stock Broking, Miditech, Naukri.com, Nagarjuna Construction & PVR.

But none of these companies are start-ups per se. They have been in the industry for quite sometime and even before their funding from ICICI Venture, they were profitable. In the same league, take the example of UTI Ventures. Its portfolio of investments consists of Consolidated Constructions, Koutons Retail, Laqshya Media, Primus Retail, Subex Azure, South Indian Bank & companies like Natural Bioenergy. In most cases, the same story is repeated, of companies being already among the prominent ones or out of the incubation period and have learned to walk on its own or experimenting with a ground breaking concept. In its own way, there’s nothing wrong with private equity companies investing in such enterprises because for a country like India where entrepreneurship has to grow exponentially in order to solve malaises of unemployment, poverty & rural-urban divide, the best thing that can happen is to give a helping hand to middle-level companies to take them into the big league. But problems of availability of seed capital for a conventional start-up still remain, as most private equity & venture capital companies have already shown a preference to established companies.

Private equity companies are essentially driven by high returns that they expect to get in few years down the line, and later exit the company through IPO. Given the high expectations of the investors, their investments would only be justified by exponential returns from the companies where they have put in money. All the more reason for investments in already stable companies or those which are path-breaking. The website of ICICI Venture (iciciventure.com) states, ‘The funds managed by ICICI Venture endeavour to provide financial assistance to well established/existing enterprises with robust business models and healthy balance sheets through a variety of investment instruments. The investment philosophy is to pursue transactions with established enterprises that are leaders or potential leaders in their respective markets and where there is a clear proposition for value creation.’ That defines it all.

The struggling painters at Kolkata’s Book Fair are mirror face of the teeming millions of young Indians who require a support system to nurture their aspirations. And aspirations need not be to be the next billionaire in the Forbes List or the business concept need not be the next big convergence idea. It can simply be to become financially stable. For India and its bag of problems, the need of the hour is more of conventional business which need not have very high returns but essentially can bring about a paradigm change in economic contours through ignition of commercial activities. For a country where banks still remain perennially conservative in lending norms, bridging the rural-urban divide will only be possible when distance between Private Equity & microfinance can be bridged with conventional banking playing more proactive role in financing conventional start-ups. Microfinance is too small to finance them while PE companies wouldn’t be interested in conventional small ventures. The change can only happen if the very paradigm of Indian banking is changed.

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Source : IIPM Editorial, 2008

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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