PE-funded firms do better, says study

In India, private equity has moved on from being just a financier and stakeholder to expertise creator.

It helps investee companies in a host of activities — forging strategic alliances, assisting in corporate governance and providing management advice.

The Four-S Services study has found a positive difference in the sales growth of PE-backed and non-PE backed companies. Between 2002-03 and 2006-07, PE-funded companies witnessed sales growth of 27.5 per cent (four-year CAGR) compared to the 18.6 per cent growth for non-PE backed firms.

Operating profit of the former increased 29.9 per cent against 12.3 per cent of the latter. Companies with PE investments registered a healthy four-year CAGR growth of 42 per cent in their P/E multiples compared to 28 per cent for non-PE backed companies, clearly showing the long-term impact of financial and strategic efforts of PE players.

To put things in perspective, the entry of TPG Newbridge and Chryscapital in Shriram Transport Finance helped the company in its phenomenal growth through opening up funding options and increasing assets under management, while maintaining the return on equity (ROE) above 20 per cent.

Similarly, PE fund Actis Partners guided Jyothy Laboratories in its inorganic growth plans. JBF Industries Ltd is an excellent example of a company achieving over 50 per cent growth in its revenue and margins since receiving funding from Citigroup Venture Capital in June 2005.

Sumit Chandwani, Director, Investments, ICICI Ventures, says, “Private equity gives credibility to a firm. It helps them grow inorganically, assists in risk management and works with them through ups and downs of the cycle. For unlisted companies, it prepares them to go public.”

PE-backed companies have also shown a four-year CAGR growth of 35.2 per cent in distributable profits to shareholders compared with a mere 18.8 per cent for companies with no PE funding.