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Are MSMEs ready for private equity, venture capital? What experts say

According to experts the root problem from the domestic MSME sector is failure to attract the private capital into their business, leading to constant starvation for funds

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India's MSME sectors were highly affected by the wrath of Covid-19. According to CII, MSME sectors employ about 12 crore people and about half of the Indian exports. According to experts the root problem from the domestic MSME sector is failure to attract the private capital into their business, leading to constant starvation for funds.

“MSME owners and entrepreneurs should thrive to rope in professional money. Without any predetermined rate of interest, private investments are the most expensive form of capital for a business. One should use this capital in areas where the return on 

investments is higher than the cost of capital. Investing this capital judiciously in the needed business areas can fetch much higher returns than the actual cost. Lenders are not active participants of your business, whereas PE funds or VCs participate in the growth actively and give a professional structure to the business. They come with high expectations of returns on their investments," said Raghunandan Saraf, Founder and CEO

of Saraf Furniture.

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Private investments are the most expensive form of capital for a business. Chandan Garg, Chairman & MD, Innovana Group said, “The growth and expansion of MSME industries is indispensable; the coming period will witness a huge change in this sector. And, private capital investment will play a crucial role here."

“I feel bringing in private investors in the business can have its pros as well as cons. On one hand, it could resolve funding problems of several MSMEs, while on the other, a business might also have to lose its autonomy in decision making. Private investments will bring some experienced minds on board and this could in a way impact the operations and even the overall structure of the business. And, if an enterprise is willing to adapt, then the private capital investment is certainly good news," he added.

In India, the MSME sector is the key source of employment and plays an important part in the overall economy. However, like their larger peers, MSME also needs access to quality capital to stay afloat, grow, and transform. “Though there are investment sources available in the form of banks and NBFCs, there is an inherent benefit with PE capital. Contrary to a short debt, a PE company provides capital for the long run. Moreover, PE players also get involved with the strategy and management of the company and can share valuable expertise, which can help MSMEs to eventually scale up fast. It is not just the capital alone but the long-term expertise, which can be the game-changer," said Ridhima Kansal, Director, Rosemoore.