MUMBAI: Many private equity funds (PEs) are seeking to invest jointly with rivals in companies as it mitigates risks and insulates them from allegation of failures.
“Co-investments are certainly becoming a trend not only from the size perspective but also from the view of jointly evaluating and negotiating transactions,” says Darius Pandole, partner at PE firm New Silk Routeor NSR.
Co-investments provide an independent valuation and add more conviction to investment decisions. “The funds draw on the comfort that comes from having a new pair of eyes to review and vet the opportunity,” says Subbu Subramaniam, founder of $60-million PE fund MCap Advisors, which had earlier co-invested in wind power projects solution provider ReGen Powertech with IDFC. It re-invested recently in it alongwith TVS Capital.
“In addition, when it comes to due-diligence, one might pick up an issue that the other may have missed, thereby ensuring that nothing slips past between the investors.”
Some small funds, dwarfed by large rivals, find many opportunities by co-investing, but some see it as survival.
“It is also a survival tactic, there is always strength in numbers,” says an investment banker. “Management and limited partners cannot blame the fund manager alone in case a deal turns sour.”
Co-investment also helps companies with funds when required. “There is a possibility of fast growing and high-tech companies going through multiple rounds of funding, in which case, two investors are better than one, in order to keep the company adequately funded,” says Subramaniam of MCap.
Co-investments is common in the silicon valley in the US. American PE fund Kleiner Perkings Caufield Byers or KPCB, has been co-investing since the 1970s and has invested in Cypress Semiconductors, Electronic Arts, Flextronics, Symantec and Google.
Private equity firms in India, which had traditionally invested alone in companies between 2003 and 2007, changed strategy to co-invest after economy slowed down.
Large deals and comfort are the key in attracting PE firms to co-investment. “A lot of deal sizes getting larger, therefore, with the limited funds that some PE funds have, firms look at it often,” says Munesh Khanna, partner at Grant Thornton, a merger and acquisition and PE advisory firm. “Comfort factor comes in with a partner.”
“Co-investing puts the focus on the business of investing rather than on aspects such as board position, etc. which may not come your way in a co-investment scenario,” says Subramaniam of MCap. “It is vital to have a trusted partner and a high level of understanding and it is comforting to see that this trend is picking up in India.”
Co-investment also helps keep valuation reasonable. “Sometimes you feel it is better to co-operate than compete and drive prices up when there are three-four suitors for a particular deal,” Pandole of NSR adds.
Two or more PE firms invest together keeping in mind a common agenda and they have largely agreed upon terms and conditions before finalising a deal. But lack of independent decision-making could be a drawback when it comes to co-investing.
“The only limitation could be reduced flexibility in terms of work because one firm has to work in tandem with the co-partner,” says Pandole of NSR. “It is also good for the promoter because he does not have one large investor sitting on his head,” says the investment banker quoted above. Funds need to focus on the chemistry between the co-investors. “As each fund is responsible to its investors, and is bound by its own cycles and compulsions, it does not take much for the partnership to form cracks,” says Subramaniam of MCap. “There should be layers of communication channels between the co-investors.”
“This is the reason why typical co-investments happen between a GP and its LPs, and most experienced co-investors tend to make multiple investments,” he added.