So where would the differentiation come from? The answer to this, perhaps, lies in four strengths enjoyed to various degrees by most conglomerates: Track-record, Networks, Knowledge, and Brand.
Track-record: Successful conglomerates know how to create value. For example, a third of both the sensex and Nifty are made up by companies belonging to conglomerates. Not only have these companies rewarded their shareholders over time, they have proved to be tremendous wealth creators for their promoters. Tata Consultancy Services is a case in point. With a share capital (promoter’s equity) at IPO of about Rs 36 crore, the company today has a market capitalisation of over Rs 64,573 crore. Last year, a partial dilution of promoter holding at Tata Tele Services Ltd saw NTT DoCoMo value the company at over $10 billion, creating tremendous value to its promoters.
...However, the biggest challenge for any conglomerate in PE relates to “conflicts of interests”. A typical question from a potential investor might be “How can I gain comfort that you will act in my best interest, rather than that of your group?” Unlike stand-alone private equity fund managers, conglomerates promote other businesses and can have competing interests to that of portfolio companies.
...The desire to maximise the leverage of the conglomerate group needs to be balanced against the need to be independent of this same group. This works best where individual companies within the group already operate with a high degree of independence from the ultimate promoter. Having a professional team with credibility in the market to foster the operations could well be a starting point; having a separate corporate vehicle for fund management would be another. This would require a deep commitment to and an appreciation of the long-term potential of the business to produce material returns. In essence, the group has to believe that the business of private equity is an important franchise which the group wishes to develop.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at firstname.lastname@example.org