The pandemic, which had caused immense distress to the human capital around the world had also had significantly affected various other sectors namely contact intensive, hospitality sector, MSME etc. To corroborate such claims, a recent Dun & Bradstreet survey was conducted which indicated that 82 per cent of the Indian MSMEs got negatively impacted by the disruptions caused by the COVID-19 pandemic.
It is no news that the sector to be worst hit by the pandemic was the MSME sector. Thus, taking into account the intricacy and severity of the situation, last year, the Modi government had announced a Rs 50,000 crore Fund-of-Funds. According to the Modi plan, Rs 10,000 crore investment was to be made by the government to facilitate the flow of equity to 25 lakh MSMEs.
However it is to be noted that the government had expected the remaining Rs 40,000 crores of equity capital to get invested by venture capital (VC) and private equity (PE) firms. Such a move was welcomed by business diaspora and appreciated by experts as promoting external participation in a fund like this is a smart move. This is due to the fact that such external participation insures the professional and transparent disbursement of funds.
And as it is known that MSMEs are usually capital stiff or are perennially starved of any form of capital to fulfill their growth ambitions, thus MSME owners significantly were eager to bring in professional money to grow their business. However, all is not as presentable and profitable as it might sound as such kind of money has different commitments and expectations. It can be rightfully stated that it is vastly different from the debt the business might have received from a bank or an NBFC.
First and foremost, banks or NBFCs provide temporary capital in the form of overdraft facilities, term loans or invoice discounting options. Thus, once your goals, for which you had raised money are met, you can safely return the borrowed capital with the pre-agreed interest rate. However, with private equity option, the lucidity of temporary nature of capital and easy borrowing would not be easy.
Private Equity investors provide permanent capital by buying equity into your business. Thus the option of raising temporary capital is longer available as investors usually continue to exist even after you may have achieved the goals for which you had raised this financing. The only exit that can take place is the exit of last resort when a private equity investor accepts an exit for a pre-agreed return.
But not all is as gloomy as the aforementioned situation might suggest, private equity investors bring in a lot of good things to the table despite the dark and dubious picture just mentioned. Private equity investors actively participate in growing the MSME business and act as a sounding board for the business challenges. Additionally PE investors can bring structures to professionalize the running of the business. How? When required, investors can open doors for business or new rounds of financing. Thus, much good can be reaped from the option of Private Equity investments and VCs.
How can businesses attract more private equity investing?
However, it is to be noted that private equity should be used in a profitable way. Private equity should be used for chasing growth as it is the most expensive form of capital for the business. It should not be used in areas that will provide an ROI lower than the cost of this capital which can be detrimental for the business. Thus profitable investment and using of capital wisely in different business verticals is essential as it would give higher returns than the cost of that capital.
As aforementioned, such kind of investment is a daunting task as every external shareholder of the company can question how you run your business. Thus institutionalization of your operations.
Reportedly, a common issue that irks many private investors and keeps them from investing in MSMEs is their dubious recordkeeping. Thus, transparent recording is a rudimentary requirement for better business opportunity and investors trust. Providing accurate and periodic reporting to the investors in a mutually agreeable format can go a long way. It is to be remembered here that further financing can be provided if and only if, the business is clear of any dubious activities. Thus operations require systematic record keeping process which should be given paramount importance.