PRIVATE EQUITY
Explaining the Role of Private Equity Companies in Today’s Economic Environment
Private equity companies have an essential role in the transformation of businesses in the modern era. They invest money in privately held firms or purchase publicly traded companies and delist them from the stock exchange. The plan is to improve and grow the company to give investors the best possible returns. In the past several years, the role of these firms has continued to grow, especially in developing economies like India.
In Indian terms, private equity companies can accelerate the change in business. These firms are not simply providing capital; they are involved in bringing energy and operational momentum to businesses so they can scale. For any company looking for growth potential, partnering with a few of the recognized private equity firms in India could be transformational as well.
What are Private Equity Funds?
An In-Depth Look at Capital Pools and Their Purpose
Private equity funds are investment vehicles that raise capital from both accredited investors and institutional investors, to then acquire ownership interests in various companies. Private equity funds are typically open for subscription for a term of between 7 and 10 years, while the funds pursue specific investment objectives, targeting undervalued/under-performers, or high-potential companies.
Fund managers (the General Partners (GP)) will locate, manage and exit the investment(s); meanwhile, the investors (known as Limited Partners (LP)) receive the benefits from the investment returns while exposing themselves to only limited risk. These funds may focus on various stages of the business lifecycle, including:
Venture Capital: Investing in new businesses with the intent to capitalize on possible high-growth scenarios.
Growth Equity: Investing in existing businesses that are expanding and have some demonstrated success.
Buyouts: Buying a controlling interest in mature companies.
Private equity funds are increasingly desirable to investors, given their potential for high returns – including those in new markets such as India.
The Impact of Private Equity Firms in India on Industries
Over the last decade, India has gained a reputation as a private equity investment destination. The young population, speed of digitization, and favorable regulatory regime have created vast opportunities for many private equity firms in India.
The following are some of the ways private equity investors are benefitting the economy:
1. Support for Startups via initial rounds of funding and mentoring.
2. Rehabilitation of Distressed Assets via restructuring and new operational models.
3. Providing pre- and post-globalization avenues for mid-sized companies via financial and strategic assets.
As there is no singular nature or trend for successful private equity firms, they tend to focus on sectors with high growth potential such as fintech, healthcare, infrastructure, and education. Given the value-centric focus of private equity investors, we view them as important partners in this economic evolution for India.
Legal Considerations when Running Private Equity Business
Frameworks and Risks
Private equity business involves serious legal complexity and frameworks. Legal considerations will drive compliance with SEBI and taxation laws, and legal considerations will provide diligence to both investee and investor.
Here are some key legal considerations:
Due Diligence: This is a complete review of financial, legal, operational, and performance before investing
Shareholder Documents: This is the ability to honour rights and returns and exit
Liquidation: Depending upon the exit routes you choose (i.e., IPO, merger, or share sale) will depend upon the legal regimental
Labour Laws, FEMA & FDI regulations: This must be complied with, whether it is a cross-border investment
Law firms, like Vrinlegal will aid in crossing each hurdle of private equity transaction to ensure compliance of all contractual obligations and creating an acceptable outcome to both parties.
Strategies Used by Private Equity Firms for Optimal Return on Investment
Private equity firms use a number of strategies to optimize return while minimizing risk. Below are some common strategies:
1. LEVERAGED BUYOUTS (LBOs) Acquiring companies using debt, while keeping in mind that cash flow must be used to service debt.
2. OPERATIONAL IMPROVEMENTS Using structural changes and/or management changes to increase performance and efficiency in companies being acquired.
3. "GROWTH INVESTMENTS - Providing capital to companies with the intent to continue growing, bringing new products to market, or expanding into new markets.
4. SECTOR FOCUSED INVESTMENTS - Targeting companies in high-growth sectors such as renewable energy, fintech or health and wellness in the hopes of generating long-term profits. These strategies will vary depending on the investment strategy and the economic climate at the time. Regardless the ultimate goal of using these strategies, is the same: value creation, return on invested capital."
Life Cycle of a Private Equity Investment
A Journey from Sourcing to Exit that Creates Value
The private equity business is the same type of business as any investment cycle that has well-defined stages:
Fundraising: securing commitments from Limited Partners.
Sourcing Deals: identifying target companies using market research, and network contacts and connections.
Due Diligence & Investment: conducting due diligence, exhaustive vetting, and assessments prior to signing a deal.
Value Addition: working with the company to create and add value to the company.
Exit Strategy: exit to an IPO, to a strategic sale, or to recapitalization for a return on investment.
Life cycle of a private equity investment has layers of legal sensitivity and requires due diligence. Thus, firms/agencies must partner with legal advisors that understand private equity transactions.
Advantages Working with Private Equity Firms in India
There are numerous benefits of partnering established private equity firms in India:
Access to Capital: This is important for growth, acquisitions or restructuring.
Strategic Capability: Established firms have local market intelligence, valuable operating experience, as well as, an extensive network to leverage.
Long Term Value: Private equity firms usually have a long term view (usually 4-6 years) and usually will be working towards value rather than profit.
Governance: Established firms often already have a governance structure that can help minimize risk as well as provide management with better ways to be efficient.It is very advantageous for mid-sized and family owned companies in a rapidly growing economy like India.
Issues Faced in Private Equity Operations
While there are numerous advantages of the private equity business, there are also certain challenges it entails:
Market Volatility: Changes in the economy can impact returns and exit options.
Regulatory Changes: Changes in foreign direct investment or tax law changes can influence deal structures.
Exit Uncertainty: Finding a successful exit can be challenging as the market can change throughout the exit process.
Cultural Integration and alignment: While there are several foreseen challenges to developing a partnership model or acquiring a partner, perhaps the biggest issue when doing an acquisition is trying to align management teams and two corporate cultures.
Legal advisors are a pivotal resource in navigating the challenges above, while also managing risks at all stages and making sure processes are compliant at every stage.
Ways Vrinlegal Can Help You with Private Equity Transactions
At Vrinlegal, we specialize in full-service legal support throughout all the stages of a private equity transaction. Whether you're an investor, a fund manager, or a business in search of capital, we provide:
Legal due diligence
Fund structuring and regulatory compliance
Drafting and reviewing documentations and agreements
Exit strategy development
Dispute resolution and litigation advice and support
Our depth of understanding of financial laws and related industry issues allows us to deliver effective and timely results that are aligned with your business strategy.
Conclusion: Private Equity as Growth Engine for Indian Business
Given the fast-changing nature of the Indian business landscape, it is reasonable to presume that private equity will have a much bigger presence in the coming years. With the right quality of legal and financial advice, businesses can unlock incredible value, scale their business and create enduring businesses that create sustainable wealth.
Engaging with an experienced and knowledgeable firm, like Vrinlegal, provides you with the confidence that your decisions taken, from fund formation until exit, will be both legally-compliant and commercially viable.
Regardless of whether you need advice on how to approach private equity funds, how to partner with a private equity firm in relation to an investment, or to consider a more complex transaction with private equity firms in India, the dedicated and highly experienced legal team at Vrinlegal can guide you along the way, so that you can make the right decisions and be secure along the way.