Strategic capital will chase responsible companies in India

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By  Sanjay Nayar

Sanjay NayarThe current economic scenario could possibly undo the growth that followed the economic liberalisation of 1991. Even though long-term capital is imperative for sustained growth, businesses are not attracting the right partners. While anyone with funds can bring in capital, a partnership philosophy is critical to ensure that investments result in value creation. Why aren’t companies in India attracting strategic long-term capital? There are multiple reasons for this.

Firstly, government policies need to be shaped in such a way that they enable opportunities for capital to be put to use quickly and without impediments. The Indian entrepreneur needs to gain confidence that would lead to value-driven aggressive investments being made in the country once again. Doing business in India for entrepreneurs has to become ‘easier’. Improvements have been made, but there is more to be done.

Secondly, Indian businesses need to recognise the need to differentiate themselves and be flexible enough to rapidly upshift to a high-growth phase if they want to realise their ambitions, including going global. And for that to happen, third and equally important, businesses need to be open to partnerships through strategic capital investments. Such partnerships seek to add value and provide counsel in shaping high-potential businesses.

While there continues to be inflow of foreign capital, its long-term nature and ability to be put to work in an environment with sluggish economies abroad is questionable. India is a case of too much capital chasing few high-quality deals. But it is not the case that there is more capital than is needed.

Rather, it is that not enough businesses realise the value that capital, coupled with strategic advice and the ability to partner for growth, will bring in to improve them. What is most needed is for businesses to add credence to their commitment to India Inc, by differentiating themselves by increasing their competitiveness and responsibility.

Competitiveness and responsibility are very closely linked in today’s evolving business environment. As investors look more closely at India, there will be additional focus on these two attributes.

These both are integral to developing world-class businesses founded in ethics, spurred by an entrepreneurial spirit and directed with a clear vision aimed at scaling growth. Businesses in India have successfully developed into major local players. However, the next logical step for such businesses is to evolve into global players with international standards leading to the rise of new Indian MNCs.

Competitiveness is driven by a certain level of risk appetite. A non-existent risk appetite will lead to stagnation. If you look at India’s big home-grown businesses, they are the ones that took risks, scaled up growth and emerged victorious. This willingness to take risks drives the hunger in promoters and entrepreneurs in India to build bigger, promising businesses.

Investors looking to invest in competitive companies seek to strengthen existing resources while building on new ones. The value investors bring to such companies is the experience in building strong businesses with deep local knowhow applied to best practices from international markets. But if the local businesses only want capital, then these global investors may not invest in them.

Beyond competitive businesses, global investors are also seeking responsible companies, or companies that recognise that they need to become more sustainable. In today’s volatile economic environment, the actions of businesses are under increased scrutiny. This has led to investors looking at investment decisions not based only on profits. Businesses, however competitive and successful they may be today, need to operate within the ethos of a responsible organisation defined by their commitment to the environment, social issues and corporate governance.

Responsible companies know how to balance commitment to investors and stakeholders. This becomes important as investors seek to bring environmental, social and governance (ESG) practices into the investment process. Such practices add credibility to a business and helps investors identify similarities with the philosophy of the company they are investing in.

There is immense potential for companies to create value by focusing on ESG issues, whether it is reducing one’s carbon footprint, improving risk management or ensuring the highest levels of governance. Such an approach creates value through initiatives for stakeholders at different levels including the company, investors or externally within society. As ESG issues garner more importance, compliance, or the openness to comply with ESG norms, will enable companies to attract strategic long-term capital, thus helping them realise greater ambitions.

The current economic scenario could possibly undo the growth that followed the economic liberalisation of 1991. Even though long-term capital is imperative for sustained growth, businesses are not attracting the right partners. While anyone with funds can bring in capital, a partnership philosophy is critical to ensure that investments result in value creation. Why aren’t companies in India attracting strategic long-term capital? There are multiple reasons for this.

Firstly, government policies need to be shaped in such a way that they enable opportunities for capital to be put to use quickly and without impediments. The Indian entrepreneur needs to gain confidence that would lead to value-driven aggressive investments being made in the country once again. Doing business in India for entrepreneurs has to become ‘easier’. Improvements have been made, but there is more to be done.

Secondly, Indian businesses need to recognise the need to differentiate themselves and be flexible enough to rapidly upshift to a high-growth phase if they want to realise their ambitions, including going global. And for that to happen, third and equally important, businesses need to be open to partnerships through strategic capital investments. Such partnerships seek to add value and provide counsel in shaping high-potential businesses.

While there continues to be inflow of foreign capital, its long-term nature and ability to be put to work in an environment with sluggish economies abroad is questionable. India is a case of too much capital chasing few high-quality deals. But it is not the case that there is more capital than is needed.

Rather, it is that not enough businesses realise the value that capital, coupled with strategic advice and the ability to partner for growth, will bring in to improve them. What is most needed is for businesses to add credence to their commitment to India Inc, by differentiating themselves by increasing their competitiveness and responsibility.

Competitiveness and responsibility are very closely linked in today’s evolving business environment. As investors look more closely at India, there will be additional focus on these two attributes.

These both are integral to developing world-class businesses founded in ethics, spurred by an entrepreneurial spirit and directed with a clear vision aimed at scaling growth. Businesses in India have successfully developed into major local players. However, the next logical step for such businesses is to evolve into global players with international standards leading to the rise of new Indian MNCs.

Competitiveness is driven by a certain level of risk appetite. A non-existent risk appetite will lead to stagnation. If you look at India’s big home-grown businesses, they are the ones that took risks, scaled up growth and emerged victorious. This willingness to take risks drives the hunger in promoters and entrepreneurs in India to build bigger, promising businesses.

Investors looking to invest in competitive companies seek to strengthen existing resources while building on new ones. The value investors bring to such companies is the experience in building strong businesses with deep local knowhow applied to best practices from international markets. But if the local businesses only want capital, then these global investors may not invest in them.

Beyond competitive businesses, global investors are also seeking responsible companies, or companies that recognise that they need to become more sustainable. In today’s volatile economic environment, the actions of businesses are under increased scrutiny. This has led to investors looking at investment decisions not based only on profits. Businesses, however competitive and successful they may be today, need to operate within the ethos of a responsible organisation defined by their commitment to the environment, social issues and corporate governance.

Responsible companies know how to balance commitment to investors and stakeholders. This becomes important as investors seek to bring environmental, social and governance (ESG) practices into the investment process. Such practices add credibility to a business and helps investors identify similarities with the philosophy of the company they are investing in.

There is immense potential for companies to create value by focusing on ESG issues, whether it is reducing one’s carbon footprint, improving risk management or ensuring the highest levels of governance. Such an approach creates value through initiatives for stakeholders at different levels including the company, investors or externally within society. As ESG issues garner more importance, compliance, or the openness to comply with ESG norms, will enable companies to attract strategic long-term capital, thus helping them realise greater ambitions.

The case for ESG management lies in its ability to be seamlessly applied to businesses across the spectrum irrespective of size, value or location. Involvement by individual shareholders in companies is also increasing, not only in India, but across the world. This gives added impetus to ESG issues at the diligence stage and beyond, making it increasingly critical for companies to adopt responsible practices to attract the right kind of capital.

The right management of ESG issues has helped drive profits and unlock benefits for businesses on multiple fronts, thus leading to the creation of viable and sustainable companies. As ESG practices become an integral part of the diligence process, early adoption of ESG measures will build strong sustainable businesses of the future, attracting top quality strategic capital.

Over the next few years, as local businesses seek to realise their global ambitions, we will see our economy being spurred by companies that thrive on competitiveness and responsibility, two factors that are imperative to achieving business sustainability. Building value for amultitude of stakeholders, these companies will propagate a new business culture, defining corporate governance philosophies, while attracting long-term strategic capital with engaged investors while emerging on the world stage as companies of scale.

(The author is CEO and country head for India at Kohlberg Kravis Roberts & Co)

(Sourced from Economic Times)

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