September 28, 2011

"Mistakes to Avoid in PE Fund Raising"

Extract from an Economic Times article by Manish Kanchan, managing director of SAGE Capital.
Very often we see entrepreneurs consulting with well wishers, old-time chartered accountants or their loyal CFOs during the deal-making process. Usually this is the first time anybody is dealing with private equity transactions and are therefore completely out of their depths. Sometimes, they are also insecure about their own future position in the company.

...Investment bankers are your allies. Choose them based on their track record of having closed similar transactions Ask for references and speak with them. Do not appoint them based on the valuation they promise you. Investment bankers do not sign the cheque. Once appointed, trust them and encourage them to provide you with honest feedback directly. The same applies for lawyers as well.

...The business plan must be realistic with a slight optimistic bias. It should also be linked to past performance. If the business has grown at 15% over last 3 years do not project it to grow at 60% suddenly after the deal closes. The fund managers seek to understand your thought process, how you assess risks, how you deal with competition, from where you will get people to manage the growth. The level of detail, correlation to industry growth rates, and honesty, will win respect and improve the chances of raising money.

... Do not sign the term sheet too readily. The term sheet lists out the key commercial terms and rights and obligations of each party. This is a nonbinding document which is typically subject to legal, financial, commercial due diligence and approval from the investment committee of the fund. This allows the fund to modify its offer (or sometimes walk away). However, clauses relating to exclusivity are binding on the promoter and the company. Exclusivity prevents the company from engaging in discussions with another investor usually for periods ranging from 90 to 120 days.

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