Why are people hesitant to be owned by private equity companies?

You see the block is mental. People are more used to family owned businesses and believe that these have a greater longevity. The concept of a private equity owning a firm is new to them. Hence they do not understand whether it is good or bad to be owned by a private equity.

I believe the biggest advantage that a company has, when owned by a private equity firm is the fact that, it is bought, owned, run and floated eventually only for its own merit. There is no pressure for us to be in 'A' business or not to be in 'B' business because we do not have the emotional attachments such as, 'It was started by my grandfather, how can I shut it down?'

We buy companies only because we believe that value can be created. Secondly we co-create value with the manager and have a lot of confidence in the management of the company. During the value creation process there is a conscious sharing of wealth that has been created by the manager with the manager. This does not happen in owner managed companies where there is a clear distinction between the owner and the employee. The employee gets a salary and the owner keeps the wealth that is created.

People often argue that we are not long term players. Yes, they are right to an extent, because we are not going to stay in any company for fifty years. We would maximum stay for 7-10 years depending on how many things need to be done before we float the company back into the market. The end state ownership of the company would be dictated by what is most appropriate for it at that moment.

As far as the management is concerned there is no uncertainty because they have a negotiated position and clarity in terms of what they have to deliver and the rewards that will be given. And most importantly, the CEO of a private equity owned company can claim that the company's market capitalization increased because of his ideas, strategy and hard work. This recognition is rare in a family owned business but…

I sense a but there… What is it?

The but is the fact that the percolation of this understanding is shallow. Hence we are now trying to use some of earlier companies as role models. For example, Rajiv Mittal, CEO, VA Tech is doing phenomenally well. We have put a fair stock ownership plan, and a performance incentive where he can further consolidate his ownership. In addition we have also worked out financing structures by which he can become a 100% owner under certain circumstances by actually buying us out.

So it is pretty exciting to these managers because it gives them an opportunity to actually own the company they are running. Private equity allows them to make this transition without having to compromise.

How do you identify whether the person you hire as the CEO is the right man for the job?

It is extremely important for us to choose the right man because our success depends on him. We basically spend a lot of time with him, have a number of interviews and try to analyze the character of the person based on his reaction to different situations. We also do reference checks with people who have interacted with him professionally.

A high level of integrity is critical. We look for active evidences that when two routes diverged in a road, and where he could have taken the one, which was grey, he still chose the black and white road though it was a more difficult. This is gives us a fair idea of the values on which the man is built.

The second quality that we look for is, 'Is he a team man?' We do not invest in people who believe that they are larger than life and can accomplish everything alone. Such companies are vulnerable because you only get the strengths and weakness of that one person. An ideal CEO has to demonstrate the ability to attract, retain and motivate high potential talent. We then look into the strategic intent and the aspirations of the entrepreneur.

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