For the past few months, private equity (PE) investors have been making a beeline to the offices of Karbonn Mobile, a mobile handset maker. The five-year old firm has been growing rapidly, cornering some 15% of the market. Now, Karbonn is thinking big — international expansion, a larger R&D unit and a more robust sales and after-sales set-up.But, surprise surprise, managing director Pardeep Jain is keeping eager investors at bay. His rationale: he’s waiting for the right fund to come by and, until then, he will fund expansion plans with internal accruals and debt.However, with the whiff of an economic turnaround in the air, Jain and other promoters can’t keep eager investors at bay for ever. They need to stock up on capital to fuel their growth (and PE investors have some $10 billion in dry powder waiting to be deployed), but are wary of dealing with a sector that has had a spotty record in India.“We have been very careful [in making a choice of an investor],” says Jain. “Our expertise and resources are limited, so we want an investor who can add some value to our business and lift it to the next level.” Karbonn operates in a competitive mobile handset market, which is growing at some 13% annually, according to technology researcher Gartner, which predicts over 326 million phones will be sold in 2016.Jain wants a bigger bite of this fast-evolving market, which is getting more crowded and competitive, with the arrival of a raft of Chinese makers looking to attack domestic firms such as Karbonn and Micromax. “We do want an investor eventually, but we don’t want to take one on board for the sake of it, like some of our rivals have, and allow them a seat on our board,” he says. Promoters like Jain are wary of aggressive investors meddling too much with the functioning of their companies, leading to spats over future strategy and exits for investors.PE funds have badly bruised in the past. Investments made based on inflated valuations when the economy boomed between 2004 and 2007 saw PE funds struggle with returns. According to data from Bain, a consultancy, since 2000, PE firms have invested some $85 billion in India and nearly twothirds of these investments are yet to turn a profit. Investments in India have so far returned just $30 billion of this capital, Bain’s 2013 report stated. Added to this, controversies related to investee companies like Lilliput Kidswear — whose investors accused it of fudging accounts — are only making promoters more wary of seeking out this set of investors, even if they will soon require their monies.According to Bain’s 2014 PE report, country-focused funds for five countries, including India, declined by 40%, even though there is enough capital from Asia Pacific and global pools to invest in the country. “Fund-raising for India has become more difficult as LPs [limited partnerships, which is how PE funds are structured] have intensified their scrutiny of who they trust with their fund commitments. They are now looking much more closely at factors like team stability, GP [general partner, who typically raises funds from cash-rich institutional investors], track record and investment philosophy,” this report observes.Despite these challenges, PE remains the preferred go-to option for growing firms to raise capital. While debt-financing may be one option, many firms want to avoid a repeat of 2008-09, when companies rapidly raised debt to fuel their expansion, only to be tripped up by the global financial crisis. Going public is also an option for some promoters, but it requires some scale (Rs 300-350 crore or more in annual revenues) and plenty of stamina to adhere to increasingly rigorous compliance norms.In this context, promoters tend to gravitate towards PE. For one, the route is shorter — a public listing is a relatively long-drawn process and firms in emerging businesses without collateral can lean on the instincts of PE fund heads to raise capital.Narendra Modi’s arrival as prime minister and the new optimism in business sentiment seems to be attracting stronger investor interest. According to the Bain report, over a third of GPs surveyed expected growth of 10-25% in terms of investments made. The bullishness in investments may be catalyzed by an improving exit landscape—the past year saw a 43% increase in exits, even if the total value stayed flat at around $6.8 billion. The worst may not be over for PE funds. According to data from Venture Intelligence, a tracker of data for this sector, investments by PE funds dropped by 28% for the quarter ended June 2014, compared to a year ago. It also dropped by a fifth compared to the preceding quarter.Promoters, then, find themselves in a curious position.In Mumbai, Tanuja Gomes, cofounder of Furtado’s Music School, is closely watching the action, even as she and her three siblings plot to take their family-run business to the next level—expanding the intake and reach of their school and network of stores selling music gear.As market sentiment has improved, Gomes has become acutely aware of the need to consider an external investor, but is worried about how perceptions may cloud her judgment.“We don’t want someone with their finger on the exit button when they invest,” she says.The business, started way back in 1865 as a single music store in Mumbai, has ambitious plans.“We train around 4,000 students in music and we have 350 dealers for our products and 20 branches nationwide.”Gomes and the other founders want an investor who can push the business in new directions— how to expand online, setting up stores for high-value products such as pianos (costing upwards of Rs1crore) and reaching tier II and III towns.According to market watchers, there is a definite improvement in business sentiment and that is compelling PE investors to step up the pace in deal-making. “The activity in PE investing is expected to increase,” says Sanjeev Krishnan, leader, private equity at PricewaterhouseCoopers. “The number of funds and the pace of deal making are expected to improve significantly in the next five to seven years.”Despite this improvement, he and other experts agree that funds will bargain harder with promoters to avoid a valuation mismatch that afflicted sectors such as healthcare and consumer. Krishnan argues that PE fund managers will now ask tough questions to try and prevent a repeat of previous poor performances. “Unreal promoter expectation may spook their efforts to bag these valuations,” he says.Adds Sanjay Nayar, the India head of KKR, a fund that has nearly $80 billion in assets under management globally: “Private equity brings in expertise, technology and patience for promoters,” he contends. “This is probably the most durable form of capital.”He and other votaries of this sector point to some standout success stories in the PE space — Alliance Tire, Genpact, Infosys and Bharti Airtel — which show how shrewd investing and canny advice can reap windfall returns. “First and foremost, the promoter(s) need to be comfortable with the investor for the deal to be successful,” says Nayar, whose fund has backed the likes of Cafe Coffee Day, Dalmia Cements and Alliance Tire.Detractors, however, say PE investors — and many promoters — have limited memories. It was a mere two years ago that there were some 300 PE funds swimming neck deep in some $20 billion in dry powder. Over the past two years, at least two dozen funds may have shut shop or sharply downsized, according to estimates from bankers and consultants.Promoters too agree that PE funds can be often difficult to deal with, especially when they eagerly need capital. “There are a lot of perceptions about PE funds—that they will take over your business, even though they don’t have a clue how to run it,” says Gomes of Furtado’s. “A fund manager will tend to lose interest in a long-term plan and focus instead on returns.”PE industry veteran N Subbu Subramaniam says that it is unfair to paint the entire PE industry with the same brush. “PE funds don’t ask uncomfortable questions, they ask the right questions, which any promoter running a sound business will be happy to answer,” he contends. Subramaniam, cofounder of PE fund Mcap, and prior to that co-head of Baring Private Equity Partners, admits that the performance of PE funds in India has been mixed, but says this form of risk capital remains a vital cog to reignite growth here.To be sure, in the past six months to a year, the operating environment for these funds has improved. For example, the stock markets, which were muted for much of the past three or four years, have risen by some 21% in 2014, rekindling exit hopes for many PE fund managers.Promoters and PE funds, sensing a revival in the economy, are both in a race to perfectly time an upsurge in fund-raising. PE funds would like to invest in high-growth companies as soon as possible, to profit from cheaper valuations; promoters themselves would like to hold off signing up with them until valuations have fattened. “We don’t need just money, we require strategic depth…we want someone with the understanding of our sector…it is not just about maximizing money,” says Gomes of Furtado’s.Akshay Batra, deputy managing director of Dr Batra’s, India’s largest homeopathic chain of clinics and medical stores, is enthused by this uptick in sentiment. “In India, what is most important is that sentiment is looking up,” he says. Dr Batra’s, he adds, expects to grow its business by 30% this year. The company, which is over three decades old, has some 900 stores and clinics in 76 cities nationwide and wants to soon have 4,000 shops dispensing homeopathic medicines— both its own formulations and third-party drugs.Despite these ambitious plans, Batra is keeping PE funds at bay — for now. “We have been approached by many funds, but we didn’t get a sense of value they are bringing to the table,” he says. For his firm, the value will come from investors who can help plot Dr Batra’s retail expansion, identify new areas of therapy for the firm’s medicines and even consider expanding geographically.Jain of Karbonn is hunting for similar traits with his potential investor(s). He says that Karbonn has built a strong presence in India, but now wants to look beyond. Already, it has expanded to neighbouring South Asian countries, but now has Persian Gulf nations and Eastern Europe in its sights. “They have to be able to add strategic value,” he adds.PE funds are lining up capital to fund these fast-growing prospects. According to some industry estimates, around six funds, including Everstone Capital, ICICI Infrastructure (a fund of ICICI Venture) and Multiples Private Equity, are among the ones finalizing their fund-raising plans. “There will be a lot more deals in the next year or two compared to the last couple of years as this fresh capital comes to the market,” says Krishnan of PwC.AD Singh, founder of the swish Olive Bar & Kitchen chain of restaurants, has dealt with risk-capital investors in 2012, when he raised funds from Aditya Birla Capital. Now he’s reportedly in the market for more funds — as he charts the gastronomic expansion of his business. Not only is he keen to take his signature Olive Beach to more locations, he’s keen to expand Monkey Bar (a gastropub), Fatty Bao (Asian gastro bar) and SodaBottleOpener-Wala (Irani cafe), opened in conjunction with his executive chef Manu Chandra, to new cities.“There is a lot of interest from funds in our sector [the hospitality business is estimated to be growing at 20-30% annually], but we’d want a fund which helps with longterm strategy,” says Singh, who adds that Olive’s next round of funding will likely happen next year. “Ideally, you want a fund with a longer-term vision and someone who understands the way you [the promoter] work. The last three years have been a bumpy ride; you want a partner who can both help spur growth and also reach dream targets.”The souring of deals between the promoters of Adiga’s, Nirula’s and Sagar Ratna and its investors typify the promise and peril in this segment. All three were fast-growing food chains, but slow-brewing disputes over ownership, differences in strategy and financial irregularities finally boiled over.Singh of Olive is cautious about these escalating feuds. “There is a lot of potential for growth in this sector, but you have to find the right partner to build your business,” he says. “We don’t immediately want to raise capital, but as we expand and add another brand soon, we will probably raise funds by the middle of next year.”As PE funds chase better returns, Batra of the eponymous homeopathy chain, believes that stable, yet profitable businesses will be the most sought after. “Our business is over 30 years old and we’re growing at over 30% per year and are therefore being pursued by PE funds,” he points out. If the economic turnaround gathers steam — as it is projected to — PE funds will hope they can uncover more such investment opportunities and quickly ink deals with promoters like Batra. If promoters like Batra are ready and willing.