How PE giants came to take the driver’s seat of entrepreneurship

Crony capitalism, undercapitalism, and leveraged capital are terms we often heard in conversations a few years ago. Over time, the domestic scenario has changed dramatically. The change was initially ushered in by venture capital funds that provide capital to startups. Today, long-term private equity firms and acquisition companies are promoting and supporting the growth of entrepreneurship in India. This remarkable change is also supported by the mass markets and market regulators.

As our public markets mature, so does private capital. Private capital, although a single term, comes in many different forms for investment as well as for exit. There are mainly three forms of investment – venture capital, minority private capital and acquired capital.

Long-term/permanent private capital than public capital. However, this is not permanent either. Therefore, private capital requires exiting their investment at an opportune time. Over time, private capital has explored different forms of exit such as sale of shares, block sale in the public market if the company invested is a listed company, strategic sale in trading cases control and sell private equity to sell private equity. We have also seen other exit methods such as selling controlling shares on the public market, selling from one fund to another within the same pool, and exiting through SPAC process.

More recently, we see the new trend of private equity exiting through the mass market. This new concept has been successfully tested by private equity investors, where they exited by going public with the company’s initial public offering (IPO).

Trading firms have long believed that strategic investors pay more than the public market. The reason behind this is that strategic investors can combine their businesses and create synergies. Also, since they will control the entire cash flow of the business, they have an extra incentive to buy the business. As a result, there is a general perception that a strategic investor will pay a higher valuation. Contrary to this belief, the new mass-market alternative has begun to offer much better valuations. This is because there is greater confidence in the adequacy of the governance framework of a company owned by professional investors. With the comfort of professional management, higher corporate governance, no related party transactions, etc., the mass market is also paying full value.

This new trend of privatization is significant because it promotes entrepreneurship. Let me explain the concept. If there is an entrepreneur setting up a business or having an idea, a venture capital investment can fund the idea/business. Once the business is established, the venture capitalist will exit by selling their shares to a private equity investor – private equity will only buy the entire stake or a group of equity investors. The private sector can jointly invest. Once the business grows further, the private equity investor will want to get out. They will eventually sell to a strategic investor or through the mass market. Selling to a strategic investor reduces the original entrepreneur’s involvement. However, if private capital exits the public market, entrepreneurs can continue to run and control the business as long as they have the trust of the board of directors.

I can say that this is a big change that will bring a new age business model with professional capital, professional management and professional entrepreneur. The good part is that the regulator is also acting as the main issuer. Recent consulting articles by SEBI The proposed change of the promoter’s current regulation to the concept of a controlling shareholder is a move to make it easier for entrepreneurs and private investors to access the mass market. Identify the advertiser, the advertiser’s group and the advertiser’s relatives; and promoter’s minimum contribution/stake/close-out requirements have been a challenge for new age companies and businesses. The concept of a controlling shareholder and the proposed change in current locking requirements will address some of these issues. Furthermore, with the increasing role of independent directors, the interests of larger public shareholders will be protected from a governance perspective.

In my opinion, all ducks are successively combined between Laxmi and Saraswati in form of capital and ability to bring us even more unicorns! | How PE giants came to take the driver’s seat of entrepreneurship


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