A letter purportedly written by Siddhartha days before his death said: 'I fought for a long time but today I gave up as I could not take any more pressure from one of the PE partners forcing me to buy back shares.'
(PE) funds, in the spotlight after the death of Coffee Café Day founder V G Siddhartha, have sought to dispel speculation about any wrongdoing in their funding methods. They say the notion that PE investors leverage bait-and-switch to lure promoters and entrepreneurs into lose-lose situations through debt products is misleading.
A letter purportedly written by Siddhartha days before his death said: “I fought for a long time but today I gave up as I could not take any more pressure from one of the PE partners forcing me to buy back shares.” He had also alleged “tremendous pressure” from lenders and “a lot of harassment” from the tax authorities.
Sameer Sain, chief executive officer (CEO) of PE firm Everstone Capital Asia, says while he can’t speak for those who invest equity with guaranteed returns or, effectively, debt-like structures, promoters are aware of what they are doing and enter into such transactions willingly.
Everstone’s PE fund (Everstone Capital), its real estate arm (IndoSpace) and the infra business (Eversource) are pure equity investors and mainly get into buyout-and-build businesses, where the investor is the promoter and owner, he says, adding that hence, there is no question of a debt return.
“We take pure equity risk, work hard, run these businesses, and expect an equity return,” Sain says. “We may have expectations but no guarantees.”
A few days ago, Helios Capital founder Samir Arora said in a tweet that although PE investors buy shares, they were actually debt investors disguised as equity investors, who seek minimum guaranteed returns on investments and then mislead the larger public.
A leading PE executive, who requested not to be named, says he “completely disagrees” with that view. “Private equity
players take an equity risk and do not, in any way, mix equity and debt. There is a conceptual conflict if both are mixed. There could be cases where debt investors disguise themselves as equity investors, but that is not the norm in private equity, and certainly not so with larger established players,” he says, adding that even for those who engage in such transactions, the terms and structures are laid out for promoters to see.
Renuka Ramnath, founder and CEO of Multiples Alternate Asset Management, says while she sees her fund as purist and doesn’t do debt, she has no issues with anyone who does.
“Anyone who takes debt or debt-like products is expected to be responsible to understand the obligations that come with that product. While you take debt in good times, if the market changes for the worse, you are caught in a situation where you are staring at business deceleration, liquidity crunch, falling share prices, and business headwinds, all coming together,” she says.
Problems don’t arrange themselves in a row and show up one after the other. They arise together, making it impossible for a debt-ridden company to come out of the crisis. Therefore, before assuming debt in a company, one needs to look at the worst-case scenario and then assess how much leverage can be sustained. However, the tendency is to take as much leverage as available without as much focus on sustainability, according to her.
Another PE analyst points out that it’s a generalisation to suggest that most PEs have a credit business. There are many, he adds, who just don't do it. “It’s not opportunistic, but more to do with the thesis of that particular fund and that particular company.”
No one forces anyone to make one choice versus another. If all leverage products were bad, then the stock market would be equally responsible for a number of casualties, Ramnath says.
If a promoter wants to pledge his shares and borrow at a very high cost and provide guaranteed returns, then it is the choice of that promoter and for the fund/institution which is lending or investing to price and agreed terms. “These are not retail transactions with unsophisticated individual borrowers,” Sain adds. “To make a capital provider the villain after you take their money and are unable to live up to the terms agreed is not correct in my opinion.”
In light of all the companies
that have gone bust in the last year, it’s not only entrepreneurs who have been hard-pressed. “If you look at all the recent frauds, NCLT cases or bankruptcies, the only real losers are investors (retail and institutions) and lenders,” Sain says.
The bottom-line is that debt per se isn’t an evil. “Leverage is a very important wheel of financing. Therefore, a leverage product itself cannot be coloured as bad. Just as equity investing vide stock markets itself can result in missteps when investors use tools such as leveraged positions, margins, forwards, if risks are not well mitigated” Ramnath says.