India, you can’t ignore her

Although the economy has not yet gathered the momentum commensurate with all the political talk, global logistic companies are intensely eyeing to scale up its operations in India while European markets are set to sail into a long, macroeconomic night. Being the largest fish in the sea, these companies also have the appetite to match their presence since India is spending around 14 percent of its GDP on logistics compared to developed markets which spends closer to 8-9 percent. Looking at logistic M&A transactions, local deals have so far been quite popular and often with the help of private equity (PE) firms. However, global strategic buyers may soon begin to challenge this pattern as they seek regional expansion through acquisition routes. While the Indian shores are reachable, building up a sustainable flow of business on local premises has proven to be a frustrating and challenging for many new entrants who despite of having excessive muscle power are yet to reap their excel-projected bottom lines. Short-term strategies with the ambition of attracting local clients overnight and making a quick buck via too long credit lending to clients has turned into a nightmare for some of the global companies. Despite that, it appears to be the prevailing consensus among the international logistic community that “India - you can love her, you can hate her, but you can’t ignore her” and that acknowledgement or - dare I say - realisation is about to have a severe impact locally.

New conditions, new demands, new thinking! The evolution of the local logistic industry will most likely be shaped by the following characteristics:

• global logistic standards and ‘best practices’ will be forced to become mainstream
• as scalability reaches new heights in India, tailored and select in-house technological systems will be critical to have and master to perfection
• domestic clients will expand increasingly beyond Indian soil and thereby require its local logistic provider to have a global outlook once planning
• e-auctions for contracts will challenge the management of old-school client relationships
• any sleeping rhino in the industry who is unable to adapt or modernise its unique selling points will most likely be wiped out.

Addressing the modernization phase of a logistic company, there are unique challenges faced towards the family-owned enterprises. Some of the family-owned logistics enterprises have successors and others do not. Some are scouting for a lucrative exit route while others wish to maintain the ownership within the family. Now, involving a private equity firm is not a conflict to either of these positions. It all depends on the rationale and purpose for bringing in growth or acquisition capital from any of such firms.

Advantages and challenges when partnering with a private equity firm A private equity firm can be a worthy alternative for challenging the status quo and sharpening the strategic development of a family-owned enterprise. Also, the PE’s international network and experience can add direct value to a local logistic company who may have limited experience when it comes to international collaborations. Most family businesses are managed by the founder and through fairly informal structures. This lean set-up may be an advantage at the early stage, but its structure – or lack of it – may reach a point where different skills and resources are needed to fully capitalize on growth opportunities. Some of the substantial values that a PE may bring to the table are:

• support for growth and expansion
• development of a strong corporate governance and management formalization
• planning of the family’s succession aspirations and mentoring family members for taking over
• performance improvement and balance sheet optimisation.

What I have often experienced is that when 100 percent of the family’s net worth is built up around their business, there is an understandable inclination to be very cautious with that business. But logistic companies – being the backbone of our economy – must go through an ever-changing process in accordance with its clients and what the family must keep in mind is that the PE’s job is primarily to provide capital and in helping getting the business to the next stage of growth. Having mentioned this, it is important to note that a family enterprise must come to private equity for the right reasons, and not because maybe there is a big check, because an initial public offering (IPO) may not be easy to do, or because the process of listing the company is too painful. There should be openness and willingness on both sides to cultivate a constructive partnership culture. An owner must look for a partner with a proven ability to add value without micro-managing day-to-day decisions. To paint a nuanced picture, the typical challenges of collaborations between the family and the PE are typically either culture clashes during the transformation process or a conflict by the time of the PE’s maturity for an exit, where the family operates with much longer time-horizons.

Navigating through the coming years Colombus had no idea what country he discovered. Like him, many global logistic companies are in the dark. What they know is that they have set foot on a shore, and the massive growth in the country exists. This will not be the scenario in five years as they will learn and become local hence it presents a current opportunity for local enterprises to a) be ruthlessly honest of one’s own vulnerabilities b) seek paths (or collaborations) for improvement and c) setting the direction for an ambitious market positioning while the market is yet not overcrowded and full of big sharks. Therefore, joining forces with a private equity firm or a strategic player can be a wise move for some families once propelling through the coming years’ turbulent industry environment.