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