Love at first sight- the makings of a great date

After meeting a fairly promising company last week, my mind re-wound back in time to some of the first meetings we have had with entrepreneurs who since then have gone onto do bigger things (whether funded by us or otherwise). Could'nt help notice the fact that the first instinct after those meetings were overwhelmingly positive. And this had nothing to do with commercials - valuation, terms etc.

And in a large majority of the cases, the feeling was mutual - so it was not the buyer necessarily hankering after the seller or vice-versa. A good number of those have translated into professional, informal relationships far beyond that of the immediate call of duty then. (the transaction).

Curiosity for the other: In a large majority of the cases I analyzed, there was a thread beyond just the meeting that had aroused a curiosity in either. the first meeting of this type (for the promoter) or a strong reference on the counterparty ("Hey, I heard these guys are good", "They are pioneers in their thought process", "Strong team that have made delivered results consistently" or "These are one of the smarter PE guys around", They really build relationships").

Preparation from both sides: The best interactions are those in which the answers and the questions flow freely (none of the "I will get back to you. We have not thought about it " etc.). Even in the rare case of an action item that spills over, the progression happens automatically without any follow-up (no repeated phone calls/e-mails).

Sense of empowerment amongst the team : Rather than a peer to peer interaction, the best interactions are those where there is a lot of cross-firing and creative exchange of ideas. There is no one guy who leads the verbage from either of the teams -

Experience and domain knowledge: This often shines through anecdotal evidence of experiences the entrepreneur/investor have had in the past. The seasoned guys know what they are talking about, do a honest acknowledgement of market realities and have a sense of how to marry the market opportunity with their internal capability. For eg., going after a 1% marketshare in a $ 1 bn market in waste management equipment means nothing; however, saying "We will go after the top 20 government bodies that buy 70% of the total equipment in the country and we are already enlisted as the preferred vendor in 8." means a lot more.

As Neil Diamond's song goes " The first cut is the deepest". It seems like there is love at first sight, certainly in the business we are discussing.

~Varadha

(varadha.r1@gmail.com)

+91 9940670064

Aftermath of a deal - Managing the monkey on your back

In continuation of the earlier post, I will try and cover some of my perspectives in terms of what entrepreneur's management of the investor.

• Inducting the investor into the organization:Too often, the promoter forgets that the investor means nothing to the rest of the people in the organization. These are precisely the people who would have to interact with the investor in minutiae like financial reporting, compliance, business metrices, MIS-es etc. I have often found that a town hall meeting equivalent (post the deal) helps induct the investor into the organizational maze and helps in setting a context for what is to follow.
• Creating an atmosphere of credibility and transparency: I have come across promoters who often "massage numbers" before sending them out to investor or simply turn a blind eye to the investor (to the point of exasperation). While this might provide for gratification in the short term, it is important to understand that one needs the investor's buy-in in the medium term (for raising further capital, key strategic decisions etc.) and an acrimonious relationship does no good to either. I have seem promoters who were known for their utter disdain come back to the investor eating humble pie. What goes round surely comes around !
  
• Managing expectations: Post the money exchanging hands, there is no time for bravado. Remember, the investor is as much a part of the boat (sinking or flourishing ?!) and he has as much stake in the upside. If there is a problem, acknowledge it - often a collective reflection (with the benefit of an outsider's perspective thrown in) can help devise simple solutions. The later this happens, the tougher it is to get out of the maze.
  
• Using an investor as a sounding board: I have seen too few Indian promoters push their investors - remember that an investor can bring value to progressive steps like baking in market intelligence/ competitor information, recruiting senior management, instituting processes and systems, because they have the benefit of a wider network and a larger perspective across businesses. Very few boards make everyone of the board members make a case for the value they added at the end of each year (Ala Infosys). A board in which everyone contributes often works wonders (as the investor realizes the rigours of the business and the entrepreneur realizes the expectations of the investor) in driving change towards a collective vision. I recently came across an entrepreneur who wanted me to help him out with the detailing of an overseas acquisition - the risks, valuation, deal and pay-out structure - that is a progressive step and that is the way it is meant to be !
  

Ahhh, all this serious talk is getting too boring. Let us talk about something a little more interesting next week.

~Varadha
(varadha.r1@gmail.com)
+91-9940670064

The morning after - aftermath of a deal

Great - you've executed the deal you have always longed for. What do you do next ? One of the most important things I have observed (with my limited perception) is that the way in which the handshake is executed post the money exchanging hands is one of the key determinants of value creation. It determines if you will wake up with a hang over not worth remembering or if it will be a relationship worth cherishing.

Often the counterparts get drained out by the time money changes hands that there is often a period of quietude following the transfer of money. So the entrepreneur at his end, often thinks it is free money he has got and the fund manager thinks this fresh money would be the elixir to all of the company's problems - past, present and future. Sounds familiar ? Nothing could be further from the truth.

Call this a post-nuptial, if you will. A robust marriage, after all, does call for a set of rules that both of the counter parties promise to abide by. Often, the set of rules (said and unsaid) and the implicit, taciturn understanding that is developed during this period are the most critical to long term sustenance.



In a two part series, let us look at some of the thins a fund manager has to make clear at the beginning of a relationship.

• Creating credibility in the minds of the promoter: Small details like returning phone calls, responding to mails, developing a rapport with the rest of the management team, taking the initiative to understand the softer aspects of the organization go a long way in making the promoter more accommodating and lessening his distrust.
• Exercising influence: The smartest fund managers are the ones who seem to balance the drive towards results with the team building/interpersonal skills. More often than not, fund managers take one of the two extreme stances - throw a fit during meetings on the numbers or do not raise any questions at all (irrespective of the performance !). This simply cannot be !
• Understand the business in detail: Adding value to a portfolio company is not about discovering new markets, new M & A opportunities (the promoter is in the field and he should have a ring side view after all) but is to help facilitate a path towards putting together the building blocks that help you get there. For eg., it is about watching out for the risks that you need to watch out for in an M & A, how do you transition someone in senior management out etc. rather than identifying M & A targets or
• Explaining the requirements in detail: Do you need monthly numbers or quarterly numbers ? How frequently would you want to do a review ? How deep an insight would you want to get into the business ? Would you want to talk to the rest of the senior management team also on a periodic basis ? Would you exercise your consent rights on every single major capex (land, building purchase) or would you be alright okaying them post facto in a quarterly board meeting ?
• Assimilating yourself into the organization: One perspective (that of the promoter's) is never going to give you adequate insights into the organization or the market. For you to get a well rounded perspective, you need to be on first name terms with at least 4-5 of the senior management (and ensure they feel comfortable sharing any controversial views/insights/perspectives). One can never underestimate the importance of this and this helps envisage problems ahead of time.
• Driving change early: There is never a better chance to drive change (ranging from to be completed post the deal to process changes to augmentation of senior management) than the early days of marriage. With passage of time, change becomes that much more difficult to enforce - the later you do it, the more time it takes (because your tolerance level increases as well 'coz you are used to it anyway!)

In the next part, I will talk about how an entrepreneur needs to manage the early days of a relationship from his side.

~Varadha
(varadha.r1@gmail.com)
+91-9940670064

What to look or in a VC ?

The recent news article about LPs getting increasingly disenchanted with their emerging markets portfolio is at odds with the bull run in the capital markets. I had talked about this in my earlier post - about the imminence of consolidation in the PE market in India. While this shake-out is going to inflict a lot of pain all across in the medium term, hopefully it would lead to sanity all around in the long term.

Getting back in line and continuing from the last post, I thought it best to do a critical self-appraisal of my brethren. So, what are some of the aspects an entrepreneur (or an investment banker) should look for in a VC during the limited interactions they have ?

• Understanding of business & appreciation: Is the VC giving you undivided attention during the meeting ? Does he/she come across as one who is willing to learn about your business and appreciate the finer aspects ? Can he understand the business beyond just numbers- CAGR, EPS and the like ?
  

• Communication: The same point I had outlined in last week's post holds true here. If he cannot pick up calls/respond to mails and convey decisions unequivocally and on time, how can he hold water for the long term ? What is the reputation of the person you are dealing with in the market ? Is he known to be not temperamental, rude and professional ?

• Relationship vibes and passion to build a business: Is this a guy you can get get comfortable with personally ? Will your team be comfortable interacting with him ? Is this person a shoulder you can cry on should times turn bad ? The easiest way to ascertain this is to look for anecdotal evidence from the VCs side of having added tangible value in their portfolio. A lot of inward looking entrepreneurs would rather have a passive financial partner than an activist, high-maintenance VC. The smart ones look beyond the pester (much like Socrates did with his wife Xanthippe) - "If I can tolerate her, I can attach myself to every human being else."

In summary, some of the best relationships are informal and between two level-headed people who have no qualms in disagreeing yet share a collective vision.

Regards
Varadha

varadha.r1@gmail.com
+91 9940670064

Spoilsports of a professional relationship

Happy to note that there has been an improvement in reception to this blog and the ideas of yours truly. You may have noticed an E-mail feed on this page - you can subscribe to this feed should you wish to make life easier for yourself. Was also able to get quite a few ideas during the vccircle conference in Chennai.

Cutting to the chase, I guess anyone and everyone these days has had experience of people who do not pick up phone calls (nor return them) and are always blowing hot/blowing cold about key decisions. Had a recent experience last week that got me thinking on some of the things that kill the trust and respect in a relationship.

Btb, I do not mean to be hypo-critical - I know I may have done a few of this myself :(- . This is as much a lesson to me.


Communication: How many times have we come across people who do not pick up calls or return phone calls ? One phone call not returned might be a case of poor memory or a tight schedule but consistently skirting calls does not send the right message to the counter party. Is this a company/entrepreneur you want to work with at all ? If he/she behaves like this now, how would you deal with him post money exchanging hands ? A honourable exception to this breed seems to be i-bankers who have made this incommunicado posturing into an art !

Clarity of thought: I have personally met a lot of promoters who are happy to say that "a lot of investors/confidantes/advisors/bankers feel that my business model needs to be tweaked because it can unlock better value for me " (read that as higher valuation). I, for one is from an old school of thought and believe that an entrepreneur has to believe in himself more than everyone else and should eliminate all noise (investors are noise too !!) unless there is a fundamentally strong rationale underlying the change. If you do not believe in the idea, who else will ?

Lack of humility: My favourite put-offs are those who humiliate their sub-ordinates in front of everyone, treat office boys with contempt and their guests guests with indifference (how about throwing the visiting card on the table for you to pick up, dearie ?!) ,. Other pet peeves include people who ascribe all success to themselves, speaking ill of all of their competitors ("that guy is a crook and knows the minister", "he does not know how to run a viable business"). Subtle as these might seem, these are signs hard not to miss. An investor of course has to remember that these are guys who have to keep thousands of analysts happy at a later date.

Managing expectations: Right from the time of meeting to the order pipeline (that perpetually seems to be on the way!) to revenue to profit numbers, the smart guys are those who think long term. They tend to avoid evasive/overoptimistic replies that often damage their credibility in the long term. A deal takes 3-6 months to consummate, so why overstate numbers today if the truth will be out soon ?

I guess dealing with simpler, easy to understand people makes investors' (or an entrepreneur's ) lives easier than having to double guess the intent on the other side all the time. Doesn't it ?


~Varadha
(varadha.r1@gmail.com)
+91 9940670064

The Curious comparison of Private Equity and Bagger Vance

Apropos the comment on value addition in one of my earlier posts is well taken. Agree to the fact that as long as the promoter treats you as a partner and there is a high element of trust and transparency in the relationship, there are not too many reasons why the marriage (PE infusion is is a marriage) should fail.

I would like to believe that a PE fund is similar to the support crew for a marathon runner or a caddie for a golfer (could not help comparing it with the movie "The Legend of Bagger Vance" I saw the other day). The comparison does sound a little corny, but here goes nevertheless...



Not too dissimilar to the relationship between Bagger Vance (Will Smith) and Junuh(Matt Damon), the relationship is not permanent, but not fleeting either. Ultimately, it is the golfer (read promoter) who calls the shots. The Caddie's core job is to carry the golf kit (and in the case of capitalism, bags of cash ! - argh, that was quite tacky, wasn't it ?!).

The caddie can only help exorcise demons in the minds and bring in perspectives that otherwise might elude someone who is focused on his job. So what does a caddie bring in ?

Peripheral vision: What are your other competitors doing ? Is there a better way to do what we are currently doing ?

Order and discipline: What is the best way to position a ball before hitting ? How would you want to proceed on taking into considering the terrain, weather and the competition ? Who keeps track of the spoken and the unspoken ranging from body language to quality of each shot to hits and misses ?
Confidante and sounding board: Temperance of of the highs and lows of essential are necessary for consistency of performance. Often, a person who is emotionally attached to his sport might find it difficult to distance himself from it. It is the caddie, who serves as the shoulder for the golfer to lean on, during times -good and bad.

Suffice to say the golfer knows his game better than the caddie (otherwise why would the caddie be a caddie, after all ?). We must remember that a caddie is not indispensable but often can lead to that marginal extra that can prove decisive in the long run.

What say readers ?

Varadha

(Varadha.r1@gmail.com)
+91 9940670064

4 F's of Value Creation

Given a lot of Indian Entrepreneurs have a lot of fire anyway, I was wondering what differentiates the Suzlon's and the Infosys-es of the world from the also-rans. Here goes my thoughts :




Focus : I have seen the case of more than one excellent entrepreneur who tends to take his eye off the ball. Too often, there is another opportunity that comes along that for the right reasons, looks far more lucrative. Can you imagine a Sachin Tendulkar switching to football because he has achieved everything in sight ? Can you imagine Tiger Woods playing anything but golf even 20 years from now ?

Typical distractions are real estate, restaurants, schools etc. that also give you an added social tag. The focussed ones refuse to take the bait and instead improvise/innovate on their core business. The others inevitably regret it. The ones that successfully juggle different businesses are not the ones that micro manage, but find the right people to delegate to and manage by reviews and numbers.

Finesse: This is probably the most under rated quality that the most successful entrepreneurs possess. Too often, the ego, the past successes weigh heavily in the minds of entrepreneurs and force him/her to take a decision that may not necessarily be the best for everyone in the eco system. For eg., " I have dealt with unions before - let us shut this factory", "We need to do this acquisition at any cost " etc. The good ones know where to draw the line. They know how to treat their customers and employees well. That creates a virtuous cycle . More importantly, they know how to self-promote their company by touching the right wires in the eco system - case in point being Infosys whose PR machinery is always working overtime without necessarily giving that impression to the outside world. These become even more so important during critical occasions like an IPO, acquisition, investors' exit etc.

Flexibility: There is a thin line that differentiates Flexibility from Focus and the good ones seem to know it by magic. If the demand for your product is not as great as you would expect it to be, would you find the markets that can give you the demand ? Or would you tailor a new product that has a larger demand in the existing market ? Needless to say, there are no easy answers. The good ones take a periodic check on the business (both internally and externally) and often take calculated, mid - course corrections. For eg., who would have thought Steve Jobs would make success of iPod when it was released in 2001 ? A standalone music player in an era of convergence ? From a company known for its computers ?

Fast & Decisive: Someone famously said "A half executed idea is better than a paper vision". The good entrepreneurs move fast and decisively. Too often, I have seen issue like " We recruited him. He is not performing upto expectations. What do we do ? " persisting for a long time, board meeting after board meeting. Either you augment his skill sets with other people (sub-ordinates or peers) or get a better guy or help him to upgrade his skills.

Any thoughts, anyone ? Is there more to it ?

~Varadha
varadha.r1@gmail.com
+91 9940670064

J-Curve and the art of "Indian valuations"

Amidst the usual riff-raff of "Oh ! Dealflow has started thawing but so have valuation expectations, if so, even more", I thought it is best to discuss the concept of "Indian Valuations" since they always seem far removed from the rest of the world in terms of logic (or the lack of it). Ask anyone in the primary/secondary markets and they would tell you the same thing - India is always an expensive market when compared to the rest of the emerging markets as well.

In the PE world, more than ever, valuations seem to be dependent on ever increasing projections with an explosive growth budgeted for in the first 12-18 months post fund infusion and a steady 40-50% growth (?!) post that. However, IMHO, reality is far removed and completely counter-intuitive. Most companies I have seen have slow build-up of momentum and the torrent comes gushing out only after 2-3 years (what is known in technical parlance as the J-Curve). Why ?

• Transition of "Vision" and mindset: This is singularly the biggest roadblock to the immediate blossoming of an organization. Most often, PE deals take so long that promoters want to get into operations immediately thereafter and often a gush of liquidity is just the right medicine they need to go after the product/client/business they have always dreamt of. But what next ?
• Organizational build-up: Most entrepreneurs have always bootstrapped during their formative years - so MBAs and industry veterans were always given a pass because they cost too much. Even if fresh money has come in, it takes anywhere between 3-6 months to staff the key positions and another 3-6 months for the new recruits to be brought to speed to deliver.
• Market delays: Governmental clearances for the new land acquisition pending ? MoU submitted with vendors/customers yet to translate into commercials ? Temporary loss of demand for the product/service ? Undercutting by competitors ? You name it and it happens
• Business learning curve: Going after $ 5 mn contracts is not the same as going after $ 50 mn contracts. You may the right people but the smartest people still take time to understand nuances of what the customer wants and how the end product needs to be packaged/presented.
• Cultural/integration issues:In most cases, PE funds, being the "progressive animals" they are, induct fresh, young, smart talent who often come at better designations and higher salaries. This tends to cause a cultural rift within the organization with the old folk resenting this treatment. This leads to involuntary attrition/execution roadblocks within the organization.

As thumb rule, my experience has been that projections tend to be put off by one year in the best of teams and by 2-3 years at the other end. So, there goes the effect of J-Curve. Needless to say, the smarter PE funds have started baking it into their projections and have tended to adjust their valuations accordingly.


Regards
Varadha
(varadha.r1@gmail.com)
+91-9940670064

Due diligence in an Indian context - what to watch out for ?

Before I begin, I must say I have been quite happy with the response I have been getting on the blog from the handful of people who have been following it. There has been overwhelming criticism that I am painting a gloomy picture of PE in India and so, here goes some effort towards me cheering this up.


The Due diligence (did I hear someone say "Ouch ! that is so boring - we are already convinced about the business case. That is best left to a big 4 firm to submit a report") is one of the most overlooked aspects of deal making, especially in India where entanglements (into other businesses, either of the promoter or his close members/confidantes) are a big hurdle to deal with apart from the usual E's - Egos, Emotions and Expectations (Courtesy : Venkat of Veda Corporate Advisors, arguably one of the respected names in the mid-market deal making space in India)

For most of us, Due Diligence is a drab process where you are focussed on vetting the internal processes and financials of the company to see if they stand up to the image they have been projecting thus far. However, there are a few softer aspects that go beyond the ambit of what an external DD specialist is capable of (which have been learnt the hard way). So here goes :





Promoter:

• Commitment :Will his/her mind be fully into this business post the transaction ? If not, whose eyes are we going to be looking at ?
• Ambition :Is the promoter ambitious and willing to pull out all stops to make this a success ? This, to go by anecdotal evidence, it seems is the singular reason why some investments go the entire distance and most fall by the wayside.
  
• Professionalism :Are there any familial pulls/strings that one needs to be aware of ? For eg., feuding brothers, an acrimonious marriage with a wife who is also a business partner? Does he realize that he has to forgo a lot of his intertwining to scale this up ?
  
• Openness to ideas:A lot of promoters having been used to a dictatorial (and that is not necessarily bad in a small, growing company)
  
• Hunger for value creation: While one might think ambition should be intertwined with hunger for value creation, a small sect of promoters do not realize that there are other stakeholders - investors, employees, management who also have to reap the rewards of all the hard work that went in. There are a business groups which seem to live by the credo " Upside is all mine, downside is all the investor's".
  
• Focus & Predictability of behaviour: A lot of entrepreneurs who I have personally worked with seem to get distracted after a while (either because they are bored or get turned on by other business opportunities). In their quest for experimenting with the new, they get into risky moves - diversification, punting big, pursuit of self-glory etc.. For investors though, these are strict "no-nos"
  

Organization

• Competence:Is the rest of the organization upto scratch in terms of delivering the results envisaged for the company ? Or has the promoter surrounded himself with sycophants whose field of vision is limited to doing the best that their boss wants them to do.
• Financial checks and balances: How strong is the CFO ? Can he act as a check and balance on strategic issues - can he put the company ahead of the promoter should the situation arise ? Can he veto an unrelated diversification ? A large number of companies in India still have CFOs who are at best rubber stamps resulting in disastrous situations post the investment
• Vision and aspirations of the second line: Are the second line of management also seeing an upside in their own careers ? Or are they looking at this round of funding as one that facilitates a cushier lifestyle?
  

The above I guess is pretty much commonsense for someone who has been in this business for long. But, exactly how does one answer the above ? The simple answer is in "freeing one's mind' - Use your network to tap into market feedback from customers, vendors, peers, friends of promoter, ex-employees. I have personally found a lot of useful insights about the promoter by talking to customers, ex-employees and vendors (who are the only ones who have the benefit of "inside out" and "outside in' knowledge" - a rare but useful combination to asses a person/organization). They are the best ones to answer the following questions:

• Behaviour: How has this promoter been in the past ? Has past success changed him ? Is he committed to his employees ?
• Values:How strong are his value systems ? Does he live by scruples ? Is he keeping his customers happy ?
• Perceptiveness: Is he perceptive to market feedback ? Is he aware of changing market dynamics and actioning on them ahead of times ?
  
• Capability/competence :Do employees/vendors look upto him ? Do they think he is amongst the best there is in the industry ?

As always, happy to take any feedback. Do mail me or post your comment on the blog.

~Varadha
(varadha.r1@gmail.com)
+91-9940670064

PE fund - Single Vs multi-owner funds

With Entrepreneurship budding in the PE world as well, there are a few PE firms individually owned that are popping up as well. The background of the key persons in question varies from wealthy individuals to ex-partners in larger PE firms. For quite a while, I have been chewing as to whether it is appropriate for one single person to be the "driving force" in a business like Private Equity.





To my mind, PE is a business of perspectives - it is about making intelligent choices, gut calls balanced with a nuanced appreciation of risks and mitigants. It’s hard for a single individual to have a deep understanding in all of these areas - in most knowledge driven businesses, it pays to have a strong team with a strong "bench strength" - a group of motley individuals with heterogenous perspectives who can argue their guts off with no display of "one upmanship".


In addition, here are a number of other important considerations regarding single-owner firms:

1. It's a one man army at the end of the day - chances of you having a Zimbabwian disaster are as much s the chances of you having a Singaporean Utopia. One needs a check on his/her own emotions, persuasions.

2. Balancing fund raise Vs deployment : I strongly believe that fund deployment and fund raising may be two sides of the same coin but are too difficult for one single individual to manage. An individual who spends

3. Succession planning : What happens if the GP gets hit by a truck ? How does the second layer find fulfilment over the longer term if they know it would always be the "owner" who would call the shots ?


4. Checks and balances : Who decides what are the priorities at any given point of time ? How does one ensure that superior governance and transparency especially at the mid-market end where not much information is available publicly anyway

My sense is that a strong core team is an indispensable tool to start with in any knowledge driven industry and PE being at the pinnacle of the same is no different. So, it is a "team-driven" firm all the way !


~Varadha
(varadha.r1@gmail.com)
+91-9940670064

Anthropology of Indian GPs

One of the nicer things of being a part of a "cross-border business" is that it gives you perspectives on people from different cultures and backgrounds. This has led yours truly developing a passing interest in the anthropological characteristics of the Indian GPs and the similarities (or the lack of it) with his Western counterpart.






Reading "The Argumentative Indian" by amartya Sen only strengthened my conviction about how Indians seem to be so different from the rest of the world. So, here goes my observations on the flop side:


Wildly optimism: If ever there was an olympic sport on Reckless optimism, I am sure Indians would win it hands down. This trend seems even more so prevalent amongst every stakeholders. when one takes stake in the long term, it is not uncommon to find every single parameter ranging from time to completion, projections, valuations, number of issues being stated on other side of caution by a factor of at least 2 (and in the worst cases 10). If an Indian told you he would meet you in 30 minutes, 45 minutes is par for the course, 60 minutes acceptable and 90 minutes is when you should begin to SMS as a courtesy (saying "Running late. will be there in 10 minutes." when you are at least 30 minutes away from the destination).
This seems to stretch across all projections - case in point,being the controversy around completion of commonwealth games.

A lot of GPs too seem to have this DNA firmly baked in - I have heard of at least one GP talking about plans to go IPO for a company that apparently was on the verge of bankruptcy.



Joy of debate/Equating time with work: Ask any LP visiting India what his favourite irritant is and he would complain about all meetings in Indian running way behind schedule. Right from LP conferences to review meetings, if you are not getting exasperated by the amount of information (most irrelevant and harmless ! as in Douglas Adams' speak) by the length of the day, you certainly are not in India. Even in several offices I know of, people equate hauling themselves ass in their chairs all day to the equivalent of working hard. Ask what was accomplished and you will get everything but the answer.

Tardiness and lack of attention to detail: Somewhere down the line the Gandhian philosophy of "Simple living - big thinking" seem to have been equated with tardiness. Our attention to detail and respect for other people's lives and times seem to be low and could certainly do with a lot more attention. A lot of reports I am told are mere improvisations and "word smithing" over the previous period's reports keeping in line with our credo of "recyling" - it looks like we have misunderstood it quite a lot !

Did I miss anything ? Well, it does not look so - not certainly after the conversations I have had with my counterparts in other PE funds - we are all in the same "slowboat".

~Varadha
(varadha.r1@gmail.com)

Quality Deal Access - perspectives

On the lines of the Private Equity International conference in Mumbai that happened last week, the question it seemed on everyone's minds was "What next ?". Translated that means, with the worst behind access, how do we start hitting the road running. And the first step towards that is access to "quality deal flow". In the PE world more than any other industry, well begun is 80% done. Operational excellence is the toughest nut to fix especially for an investor. While operational excellence is achievable, it takes longer than recapitalization/restructuring, and requires a patient "Navigator" approach (and may be even a "Driver" approach), especially in a place like India where managerial interests tend to be intertwined with shareholding making organizational restructuring/infusion of fresh talent difficult.

The following challenges exist in identifying a prospective investment opportunity and grooming relationships:

• Intertwining of professional and familial relationships : India is still dominated by firms that were born in the early 90's or in the pre-liberalization era where "control" over a business existed only if it was "controlled" by a family member. The hang-over of this still persists, although one must say it is weakening fairly quickly.
  
• Eco-system of aides - lawyers, Chartered Accountants, Financial Advisors : Most businesses in India have had the benefit of an eco-system of professionals like Chartered Accountants, Lawyers, Tax consultants. Given the way business operated in India and still does), these guys also acted as "liaising agents" helping businesses lubricate the system should so problems arose. For an investor, it means additional buy-in from these stakeholders as well. I have been in at least two situations where the deal fell through because these stakeholders felt a PE fund would start infringing on their territorial rights and raise tough questions.
  
• Difficulty in getting access to information, especially on governance, compliance and professionalization which is a characteristic of an immature, poorly covered market like India. In fact, this is a problem outside of all the blue chip, listed companies. Even if information is available, it is seldom
  
• Openness to professionalization and change:This is especially a tricky one.There are several hundred competent entrepreneurs who are stuck mid-way simply because they feel comfortable maintaining status quo. They realize they are at the cross-roads - they realize they cannot take things forward without giving up some stake or relegating themselves to a role in the background.
  

The complexity of this exercise and the sheer time and effort it takes to develop these relationships has meant that most of the deals in India tend to be driven by intermediaries. Basic theory of economics would tell you that any business in which there is superior price discovery tends to bring down returns for everyone in the eco-system - probably the reason why the jury is still not out on the winners in this space, not certainly as yet.


KPMG had made this very interesting observation in their report in 2008(on PE in India) where unlike western markets, more than 50% of the deals in India tend to be driven by intermediaries (which is both good and bad - and that is a topic for another discussion).

This is bound to change in the medium term - for quality PE firms to distinguish themselves, it is important that they get access to innovative, fresh deals which are "constructed". While the correction of the last 18 months has started demonstrating the importance of operational excellence in a PE fund, the next 18 months would determine the importance of "deal access" - identifying, nurturing opportunities and constructing a deal out of thin air. It looks like more than ever that a consolidation period is around the corner !

Regards
~Varadha

GPs and the art of progressive reporting

If one were to go back to the fundamental reasons for the blossoming of private equity as an industry, the tightened regulations that were the aftermath of the Enron/worldcom tragedy would certainly be paramount. The other day I ran into someone who runs a small cap company in NYSE (which has a Mcap of < $ 300 mn). He estimated the direct cost of reporting/compliance alone to be in excess of $ 4-5 million. Anyone, of course, would tell you the level of reporting sophistication in India (barring a few like Infosys) is still some way off the international standards.

Ask any GP in India, and one of the foremost things he would talk about is how his PE fund has been working with the promoters of portfolio companies to improve governance, compliance and sophistication of reporting. However, unlike in the West, where the industry has evolved to a level where reporting standards amongst PE firms have been templatized (also partly due to the fact that most of the portfolio companies are public companies being taken private and hence are used to a much higher reporting standard in any case),

This in particular is a problem for LPs, (like Fund of Funds, Endowments and the likes) who I presume must have uniform reporting standards, irrespective of their geographical allocation. I have of course, met a couple of "Indian LPs" and they seem to be far more forgiving in their ask for information (which is not necessarily a good thing in the long term).

This brings me to the following questions :

• Can there be different reporting standards for different geographies in PE ?
• How does one have a smooth upgrade in the quality of reporting without being too stifling at the beginning and too lax in the end ?
• How do you capture “significant, material intangibles” in a templatized form ? For eg., expected attrition amongst senior management, materiality of pending law suits, forex risk etc.

It would be interesting to hear the voices of a few LPs on this.

~Varadha

Mix of Operational Vs Financial Acumen in a PE fund

This is a topic that has been close to my heart. If you were coaching an athlete to win an Olympic medal, which would be more critical ? Honing at the technique or the mind. What is more important in a product ? Form or function ? Packaging or substance ? Obviously, there are no easy answers for these.

During the glory days of 2006 or 2007, there was very little attention paid to "portfolio management" as a science, not just in India, but across the world. I recently walked into a couple of investment bankers who said the only division that is making money in the Western markets these days is the "Work-out" division that looks after restructuring and divesting LBO assets which have run into trouble.

With these lessons starting to sink in, a larger chunk of the investing community is starting to pay heed to the idea of having in-house personnel who have significant operating experience. I would tend to ascribe the following objectives to this :

• Identifying market trends ahead of time and helping build organizational competence towards tapping opportunities that succeed the same
  
• Facilitating Organizational evolution & unravelling vision
  
• Sounding board for planning and monitoring execution - eg., help draw up KRAs, performance monitors

The above brings me to the point - "therefore, what ?". So what skill sets would be critical in a role similar to the aforesaid. There are the obvious trade-offs :

• Ability to influence quiet, progressive change: Driving through the middle path of change management is an extremely tricky affair that requires patience to wade through resistant waters (in the form of organizational inertia - "if it ain't broke, why fix it ?"), getting emotional buy-in from all stakeholders (getting logical buy-in is often easy but temporal) and relentless focus to drive through to the end.
  
• Flexible yet strong character and personality that can take on "different roles" at different points of time: Often people take one role - that of an insider or an outsider and stick to it through a long time. Being a mentor to a SME business requires you to slip in and out of multiple shoes much like parenting a child - forgiving when mistakes are done the first time, stern when an important message needs to be conveyed, appreciative when progress is swift and exacting when it comes to monitoring.
  
• Ability to understand "key tactical levers" of the business: I would like to lay stress on the word "key levers"- it is not the operational levers, it is not the strategic levers (which are often easy to spot as an outsider). It is a cocktail of understanding and appreciating the organizational DNA with an acute understanding of the market minutiae (in terms of how opportunities in the market can be tapped)
  
• Bias for action: Jack Welch said "A well-executed half idea is infinitely better than a poorly executed whole idea". Period. The sooner you get to the market, the better your chances are.
  

So what would you look for in a person like this ? pedigree ? prior entrepreneurial experience ? prior professional experience ? thought leadership ? out of box thinking ? process orientation ? Financial caution ?. What would be roles that fit this cause best ?

Will try and address this in a consequent post. Would love to hear anyone's views on the above.

~Varadha

PE in India - time for consolidation

It has truly been a long time since I posted. I have avowed to myself that I shall post at least once a week. It has been a truly enriching experience over the last three years being a part of what hopefully, is still a sunrise (and not enroute to a sunset !) industry.

Wanted to bounce off a thought that has been gnawing my mind for the last six months. Having met different constituents of this spectrum - LPs, Investment Bankers, Promoters and fellow PE funds, I tend to believe that the PE industry in India is on the cusp of a large shake-out. Listed below are top reasons why :

Gap in skill sets : There are just way too many funds focussed on "passive capital". I would have thought this would have changed post the financial melt down. Truth is, the ones who missed the India bus earlier, seem to have gotten even more aggressive in deploying cash. All my dear investment banking contacts tell me that with all the free money sloshing around in the Western markets getting directed to "Emerging Markets" (what else !). I seriously think the time has come for BRICS -II. Goldman, where art thou ? May be a SMAT (Srilanka, Mexico, Argentina, Taiwan). Takers, anyone ?

Lack of focus/segmentation: I am yet to see more than 6-8 funds that pridethemselves on their focus - geography, verticals or deal types (venture, growth, buy-out, restructuring). Everyone's favourite sector seems education, healthcare and all else where India's per capita consumption is woeful. Where are the proprietary deal flows, where is the ability to construct a deal (and not study an IM for its pros and cons), where is the network of relationships ?


Impending battle for exits: This is going to be fun to watch. All the excesses from 2007 and 2008 have resulted in PE invested companies being valued at astronomical valuations (favourite whipping boys being retail, education, aviation where there is no evident route to a profitable scale-up with the exception of a honourable few). Case in point, a company that was invested into by a PE fund was valued at Rs. X in Jan '09 when the PE fund sold their stake to a counterpart. Now, I hear the going value is Rs. 2 X with hardly a change in fundamentals. Basic laws of economics point to the fact that in any free market arbitrage opportunities vanish fairly quickly. Hopefully, it would happen here as well.


Forward integration by LPs: if your friendly Mutual Fund told you that he did nothing with your money all year long and knocks off 2% off the corpus as ostensible "management fee", would'nt you be mad at him ? Ironically in an immature market like India, it does not take one too much of an effort to hire a couple of smart traders and generate a return of 15-20% from public markets. If so, what is the big deal in getting a 25% IRR from an illiquid asset class over a 5-7 year time period.

Ever increasing fund sizes : Funds are doubling their corpus every three years. Surely, the economy is not growing at 25% to justify doubling of deal sizes in the same segment(s) all else being equal; or is it ? This game has to stop - I have not seen Mutual Funds being proud of their corpuses - as far as I remember, they have been proud of their performance (historical returns). Why should it be any differnet in the PE industry.

Would love to read from others their thoughts and moot points.

~Varadha