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