How the EP giants came to get behind the wheel of entrepreneurship
As our public markets have matured, so has private capital. Private capital, although it is a unique terminology, takes various forms for both investment and exit. There are mainly three forms of investment: venture capital, minority private capital and buyout capital.
Private capital is longer term / permanent than public capital. However, it is also not perpetual. Therefore, private capital requires an exit at an appropriate time of its investment. Over time, private capital has explored different forms of exits such as the sale of minority interests, block sale in public markets if the company owned is a listed company, strategic sale in the case of controlling transactions and selling. from private equity to private equity. We have also seen other ways of exiting, such as selling a controlling stake in the public market, selling from one fund to another within the same group, and exiting through the PSPC process.
More recently, we see the new trend of private equity coming out through the public market. This new concept has been successfully tried out by private equity investors, where they exit through an initial public offering (IPO) of the company.
Buyout companies have long believed that strategic investors pay more value than the public market. The reason behind this is that the strategic investor can combine their activities and derive synergies from them. Plus, since they would control all of the cash flow of the business, they have an added incentive to acquire the business. Therefore, there is a general perception that a strategic investor will pay a higher valuation. Contrary to this belief, the new alternative of public procurement has started to offer a much better valuation. Indeed, 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, the absence of related party transactions, etc., public procurement is also paying its full value.
This new trend to make the private public is very important because it gives a boost to entrepreneurship. Let me explain the concept to you. If there is an entrepreneur who starts a business or has an idea, a venture capitalist can fund the idea / business. Once the business is established, the venture capitalist will opt out by selling their stake to a private investor – private capital will either buy the entire stake only, or a group of private investors could invest together. Once the business grows further, the private equity investor will want to opt out. Eventually, they will sell either to a strategic investor or on the public market. Selling to a strategic investor reduces the involvement of the original entrepreneur. However, if private capital leaves public markets, the entrepreneur can continue to run and control the business as long as he has the confidence of the board of directors.
I would say this is a big change that will bring a business model of a new era with professional capital, professional management and a professional entrepreneur. The good part is that the regulator also plays the role of a key enabler. The recent SEBI consultative document proposing to change the current promoter provision to the notion of controlling shareholder is an approach which would facilitate the access of entrepreneurs and private investors to public markets. Identification of the promoter, the group of promoters and relatives of the promoter; and the minimum promoter / shareholding / blocking contribution requirements have been a challenge for companies and enterprises of the new era. The concept of majority shareholder and the proposed change to the current foreclosure requirements will address some of these issues. In addition, with the strengthening of the role of independent directors, the interests of large public shareholders will be protected from a governance point of view.
In my opinion, all the ducks are lined up for a combination of Laxmi and Saraswati in the form of capital and the ability to give us a lot more unicorns!