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July 16, 2009

"PE investors rolling up sleeves at portfolio cos."

Business Today has an article on how PE firms are becoming more hands on with their portfolio companies in the face of the economic downturn.
Private equity by nature is—or is at least perceived to be—a pure financial transaction, with the investing firm picking up a stake by putting cash on the table. But it doesn’t have to be that way—not when economic growth is slowing down, demand is softening and earnings are under pressure. That’s when the pedigree and the wealth of experience of the PE player become vital, allowing him to get involved in strategic evaluations at the portfolio company. Decisions involving cost reductions, vendor development, disinvestments and cost-effective sourcing are increasingly being blessed—and in a few cases even dictated—by the PE partners.

In recent quarters, senior team members of PEfunds have been known to park themselves in their investee company offices, run marathon meetings to take stock of the financial position and devise strategies to ease the pain of the economic slowdown. For instance, Nitin Deshmukh, CEO, Kotak Private Equity, had started screening the cash flows of his 15 portfolio companies as early as in April 2008. It wasn’t long before cost control assumed more importance. The first sign of stress became visible when banks refused to disburse sanctioned loans and customers who had paid up 75 per cent of the price of goods booked refused to pick up the inventory. Satish Mandhana, Executive Director, IDFC Private Equity, recounts how foreign banks had withdrawn credit lines to some of their portfolio companies and the immediate challenge for his team was to secure a line of credit from the domestic banks.

...Businesses backed by PE from large conglomerates can gain plenty from the latter’s expertise in a particular sector. V Mart can access apparel from Aditya Birla Group outfit Madura Garments and financial products from its insurance subsidiary, Birla Sun Life Insurance, at competitive rates. Narula of Lilliput learnt a hard lesson in inventory management from Indivision. Its PE managers alerted Narula about an impending slowdown and an inventory pile-up in July 2008.

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