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