So you see the CEO as an entrepreneur…

Yes, definitely. In a management buyout situation if the CEO is not an entrepreneur we are completely doomed. I send out term sheets to actually test out how much of an entrepreneur the person is. If the existing CEO who is about to become an entrepreneur does not come back and get excited about certain things that I have deliberately woven in between lines then I would be wary of doing the transaction because then he is just a manager who is masquerading as an entrepreneur.

The actual test is: has he really crossed the chasm from being a mere employee to an owner? Because my investment will flourish only if he has an intrinsic ability and will to make money. So we have to ascertain that he has done the transition and has the strategic vision and fire in the belly to build large companies. Once this is in place, the rest can follow through.

In all of our buyouts, the CEO is critical because he is the only man whom we talk to. For example, in the recent ACC refractory that we bought, we did not start talking to the various stakeholders. The CEO did that and we made it clear that the he is the boss for the rest of the organization. As far as the CEO is concerned we are the only people to talk to as the new owners. Under no circumstances will we create a dichotomy of interest.

So you can sack the CEO

Yes, we can sack the CEO. CEOs have to be of our choice and they are the only people that we will change or influence.

How will you find an entrepreneur who accepts authority? Entrepreneurs are people who take risks and make an emotional investment. They usually do that because they do not want to justify their actions to anyone. But in private equity a super structure exists. Is there such a breed of CEOs in India who have the risk taking ability and yet are willing to accept a boss?

Normally you come across three sets of investing situations. In the buyout situations the management would be buying out the business from the existing owners, and we are only the financiers.

In that context we look at the management as the entrepreneurial team. In the second scenario the entrepreneur is also the owner and the manager. This is the most common scenario. And lastly in some cases, the entrepreneur provides the strategic direction and also likes to play a role like us. Then we collectively put a management in place and then define stringent performance parameters.

Now, to answer your question about why an entrepreneur whose genetic code is to take risks and not answer questions will come to us is because they are ambitious, and want to grow larger than what their own means would provide. Private equity would give them the boost to grow quickly but it also comes with a few strings attached. The strings attached are that the company can have good governance. We strive to set the company up for success by design.

Hence in our engagement with the entrepreneur we share the notion that one man cannot think of the strategy and drive the board as well. The company has to follow certain processes and if the entrepreneur does not want to follow them then he is not suitable for private equity funding.

The relationship here is similar to that of a parent and child. A CEO is always lonely. He does not always know whether he is taking the right decision especially if it is a family run business. He may have friends who may offer advice but it would be from their own perspective and limited to their view of the business.

Now look at the same scenario from our perspective. We have a significant stake in the company and also the domain knowledge. So on all the nitty gritty questions, which he had hitherto nobody to consult, can today be discussed with a well aligned investor.

Building this relationship is difficult. Once we make the investment, we spend time in building respect and communicating to the CEO that we will give advice only in a fiduciary capacity. The moment we successfully communicate to the CEO that we are not constantly thinking about the financial investment and have the best interests of the company in our mind, we become truly contributing partners. We are different from Accenture or McKinsey in the sense that we do not give advice and ask the CEO to bear the outcome. We are there with him every step of the way.

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