Striving for returns

This post that I read today morning made my mind go into an endless spiral of how PEs in India, in an overheated market, need to optimize returns.

While obviously the space in which early stage VCs in Silicon Valley and PEs in India, who primarily invest in growth stories are completely different, at a macro level, I tend to believe they are no different.

http://willprice.blogspot.com/2007/09/portfolio-math.html



As this post would show, the higher the volatility, the more difficult it becomes to deliver even a on-par-for-the-course kind of return at a fund level. So why should this be relevant in an Indian context ? Simply because lots of growth stories that the PE fraternity tends to invest into are still at a concept or at best at a prototype level. Examples of these are organized retail of different formats, discretionary consumer expenditure, specialized technology products/backbones.

Will customers who have been used to only voice and SMS based texting bite into browsing the mobile on the net ?

I know I am going to get killed for this, but I am an old fashioned agnostic who tends to believe that it is extremely difficult for people to change their habits and think beyond the top 1/2/3 uses of a device however so strong a value it may deliver. Of course, you could call it as a case of differentiated brand building or creating a "wow" factor. Case in point being the popularity of i-Pod, notwithstanding the advent of mobiles which deliver a music/movie experience comparable with the i-Pod. Where we still seem to have a gaping hole is in terms of fresh, grounds-up thinking to deliver a desi, indianized solution that would work for the masses. Merely transplanting ideas from the West is not going to serve the purpose.

I recently had the opportunity to talk to to a PE fund in UK which has delivered sterling returns in excess of 40-50% consistently over the last decade or so - this in a market, which is developed, in an economy that is trudging along amidst stiff competition. The secret sauce - they have NEVER lost money on an investment. Every single investment of theirs has delivered at least a 2-3 x over a 4-5 year exit and of course, they have had the 8-10x's as well. The points they tend to focus on for delivering stable, predictable returns for the long haul tend to be intutitive :

- Focus on below the radar niches : Broad themes which even your grandmother can identify do not cut ice. Can we look at mannequin suppliers to organized retailers if there is a retail boom ? Or may be a temping company ?
- Stay contrarian to popular sentiments :If everyone is running after the glamorous, flavour of the month themes, is there some fellow in hinterland crying out for attention ? May be there are value picks to be had over there
- Focus on undervalued companies - Never ride a wave, create your own. The best picks are hard nosed, straight laced entrepreneurs who have been relentlessly focussed on creating their own space in this world. For them, their business is not economics, it is passion - it is a labour of love.
- Sell when you've realized your due - If you think your company is up 5x - 10 x based on fundamentals, then sell. Never wait for the sector/theme to become hot and hope for a 40x because by the time you get time to react and start to sell, the 40x may just become 4x. Greed causes doom !

Makes one wonder when we are going to see a shakeout in India and see the winners emerge - can't wait for the moment to happen ! For with every ebb of a business cycle, there are lessons to be learnt for both the winners and more importantly and painfully, for the losers.

~Varadha