Looking To Raise PE Funding? Here’s What You Need To Know

Once an entrepreneur has exhausted his funding sources, he needs to turn towards raising equity from private equity players. It is important to select a good private equity partner since this investor will stay with you through thick and thin till he is able to find an exit.

As a promoter, one’s passion is to build a strong brand and a resilient company that will survive over the years. On the other hand, a private equity player is in the business of making money and therefore, very rightly, he has interest in only one thing – how soon he can get the desired return and exit from the company.

The best way to approach private equity players is by appointing a good investment bank that specialises in raising money for the industry you are in. The i-bank will work with you to prepare an Information Memorandum and introduce you to potential investors.

Even if there is considerable pressure on funds, the promoter should ask the private equity player some important questions such as how long the life of the fund is, what the exit time horizon is and most importantly, what the investor will bring to the company other than money. It is better to ask such questions before the funding than to find out later, after the investment has been made.

Unless the private equity partner shares your dreams, there will be contrarian positions between the two partners at most board meetings, which will prove dysfunctional for the company’s business. It is also important for both partners to agree upon the time frame for the exit of the private equity investor. I have seen a lot of companies being pushed into an initial public offering (IPO) very early in their lifecycle although the promoter felt that the timing was early.

Discussions with the potential investor will mostly involve valuation of the company, investment amount and the percentage of dilution. Terms such as pre-money and post-money valuation must be understood by the promoter.

Once there is agreement with the private equity player on the terms of the investment, it is critical to get this incorporated into a term sheet. For most promoters, it is recommended that they get good lawyers who can help them understand the legalese in the hundreds of pages of those agreements. The promoter must understand the key provisions in great details. It is also essential to read the agreements carefully with specific reference to the rights and responsibilities of a promoter.

Watch out very carefully for the IRR percentages that are being built into the Default Clause and Liquidity Preference Clause of the agreement that you will sign. Sometimes innocuous numbers that initially seem to be very reasonable can come back to bite you after a few years when you suddenly realise that a large chunk of your own equity has been diluted because of the IRR guarantee that you have signed in the investment agreement.

Set up monthly review mechanisms with the investor and make sure that you record the minutes of the meetings very carefully. Copies of minutes should be sent to the investor to guard against future denial of what was discussed in those meetings in the event your business runs into a problem.

As an investor in your company, the private equity investor is as responsible as the promoter to work towards the growth of the firm. I have seen several instances where companies were underperforming and the PE investor attempted to step in, and then made a complete mess of an already challenging situation.

Raise private equity, but with caution and with your eyes open.

About the author: Ashutosh Garg is the chairman of Guardian Pharmacies and author of the bestselling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh