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E-retailers face funding risks due to tighter private equity

Online retailers are exposed to funding risks as their access to easily available private equity (PE) funds gets tighter, according to a report.

E-retailers-AVAs per the report by India Ratings and Research (Ind-Ra), the funding through the conventional bank lending is highly unlikely and consequently the e-retailers will need to look for specialised institutional investors which have a high risk appetite to avail of bridge finance.

There has been a considerable slowdown in the flow of private equity into online retail companies, with muted deals seen during January-April 2016, the rating agency said.

The funding concerns have arisen at a time when e-retailers are undergoing a structural transition in their business model, involving capital expenditure especially after the government’s guidelines on FDI in e-commerce, which restricts them from using FDI funds in the inventory based model, the report said.

Ind-Ra believes that due to slowdown in PE funding, competitive pressure from new players in the e-retail business may reduce, resulting in higher entry barriers.

This indicates that established players will enjoy the first mover advantages and have limited operating expenses compared to the large capital expenditure that new entrants in the e-commerce space would need.

The agency also points out that the funding challenges have come at a stage when the e-retailers are attempting to move out of the deep discounting model to a more sustainable business model, with lower discounts, improving efficiencies and focusing on improving loyalty among customers, it said.

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