Can private equities run companies successfully?

Vasudeva Adiga’s mother ran the Brahmin’s Coffee Bar in Bengaluru, which is famous for its small eats. Taking a cue from his mother, Adiga started the Adigas Fast Food chain in 1994 to cater to the impatient younger generation that was mushrooming in Bengaluru. Little did he know that one day he would be partnering with a $1.4 billion global fund such as New Silk Route. The marriage (of Adigas and NSR) was one filled with excitement and fervor for both sides. Adiga Foods was a popular name in Bengaluru and had more than a dozen outlets. Adiga knew that personal supervision had to be substituted with quality processes to usher in growth and take brand Adiga to other geographies. NSR was watching the consumer sector and waiting for the right investment opportunities. They (both) instantly liked what each other had to offer.

In March 2012, NSR invested a little over Rs 100 crore in Adigas and all was going well until reports emerged about an alleged spat between the new investors and promoters. The promoters alleged that the investors were planning to oust them from the company and the investors contended that the promoters interfered in functioning of the company, despite the appointment of a CEO. The fight turned ugly when the promoters approached the Company Law Board and the move resulted in the appointment of an administrator to run the company.

In a similar turn of events, Nova Medical Centre was started by Dr. Mahesh Reddy in 2009 to bring day-care surgery concept into India. Goldman and NEA were quick to grab a pie in the company and invested close to $54 million in 2011. Nova also ran fertility clinics along with day-care centres. However, when the day-care business failed to live up to investor’s expectations, they decided to exit and what followed was a bitter spat between the promoters and investors. The promoters approached the Company Law Board alleging suppression.

It’s no coincidence that the two instances mentioned here have a common thread linking them. Promoter-investor rifts are becoming more common and are leading to value erosion for businesses. This brings us to the question – Are Venture Capitalists and PE’s fit to run companies by getting operationally involved or should they restrict themselves to a seat on the board and function more like an operationally independent advisor.

Investors are catalysts for growth and shouldn’t take themselves to be engines of growth

Promoters are celebrated for the passion and vision they have for their products and businesses. They have nurtured their ideas into successful businesses through sheer hard work and passion. They often look at investors as catalysts for growth, whereas the investors think themselves to be the engine for growth. This is one of the most common and natural reasons for the subsequent flare up. It’s natural because almost every high-achiever thinks of his decision-making to be supreme over everyone else and for obvious reasons, both the investor and promoter is a high achiever in his own way. It is the clash of egos and schools of thought that derails the wagon.

Define roles and stick to it

The investor and promoters should clearly define their roles and learn to respect it by not interfering with one another. This will cultivate trust and a collaborative approach towards achieving the goals of business. And remember, a ship can only have one captain.

Respect each other’s skills

Promoters have nurtured their companies from an idea to a large corporation which has attracted the attention of VC’s and PE’s. Without their determination, resolve, and execution capabilities, the idea would not have travelled so far. Similarly, VC’s and PE’s are process-driven and bring deeper industry insights to the board room. The two should learn to respect each other’s skills and progress in harmony. It’s when theory and practicality goes hand-in-hand that leads to a successful idea. Even if one of these two elements is absent, the marriage cannot succeed and leads to bitter and ugly battles.

Conclusion

History is rich with instances of promoter-investor spats and it is not uncommon to see this trend. The investor community should envisage a less-indulgent role while allowing the promoter to steer the ship. Just like how the ownership of the ship is not material to its captain, the promoters’ motivation lies in steering the company towards an upward trajectory because in this, they see their dreams realise, both monetary and otherwise.