Private equity is an important source of funding for modern retailers, but in India, most such deals have ended in disaster. So what goes wrong, and how can the investors and retailers ensure they don’t fall in the same trap as others who have burnt their fingers?
In the last seven years, most of the PE investments in the Indian retail sector have led to either premature or distressed exits, or court cases and counter cases between the promoters and the PE funds. It is hard to come up with even a single case where all the involved parties either lived happily or parted happily.
The flow of bad news is not only from the 2005-2006 era. Even PE investments that were consummated in 2010 – such as Lilliput – have beaten all past levels of acrimony between the investors and the investee companies. The memories of Premji Invest suing ICICI for feeling cheated by its investments into Subhiksha are raw in our minds, and the hasty exit of PE funds from Koutons still haunts shareholders.
But all this has not diminished the lure of PE funding in the minds of retail businesses – whether big or small, successful or not-so-successful, professional-promoted or backed by big industry groups. It has also not driven away the PE funds which are not only seeking newer investments but also trying to make the best out of deals gone really bad like in the case of Vishal Megamart.
I have tried to analyse various scenarios in this context. One of the questions that comes to my mind is: “Is it the nature of the retail business itself that makes it unsuitable for PE funding?” But when I look towards the developed markets, I find that there are enough success stories across formats and markets. The point is that the retail industry is no different from any other in its nature to be either suited or not suited for PE funding.
The next thought that comes to my mind is: “Is it the nature of the promoters of our retail business?” Well, that also cannot be the reason for the failure of PE funding in Indian modern retail because the promoters aren’t a homogeneous bunch of people who can be classified as a group on the basis of education, ethnicity or geography.
So, can the reason be the life-cycle stage of modern retail in India? This sector is fairly young and has been built more on the excitement of future potential than the fundamental competence of professionals and promoters. While many other businesses in India have also been built on that basis, modern retail – being the most consumer-dependent and a trading business in nature – hasn’t had the benefit of learning from the West that could be used to replicate success.
All PE deals in the Indian retail sector until now have been done on the basis of potential rather than performance. At least 90 percent of the Indian retail market is unorganised with little competition for modern retail, so it is easy to write business plans predicting a business to grow 10, 20, or even 50 times in a few years. Market potential has never been an issue in India, but capturing that potential is a different story.
According to me, it is the lack of maturity of Indian modern retail which is the fundamental reason for so many issues facing it. Retail players need to be clearer about what having a PE investor means beyond the few days of limelight when the deal is signed.
The investors too need to accept that while there is a huge potential in Indian modern retail, there are very few strong, professionally managed companies with proven formats that can meet their return-expectation in a period of only three to five years. They need to either wait for such companies to emerge and then make investments, or make investments with promising companies now and wait for a fairly long period to hopefully make good returns at the exit.
About the Author
Harminder Sahni is the managing director of the Gurgaon-based management consulting firm Wazir Advisors