Right fund size ?!

This interesting article from KPMG that talks about the PE industry in India raises a pertinent question. What is the right fund size that marries the market opportunities with the economics of running a fund ? Seems like there is a difference between the perception of LPs and GPs (page 5). If 30% of the LPs want a small fund ($ 100-200 mn) 35% of the LPs want a fund that is in the region of ($ 200-500 mn) (vis-a-vis 20% and 35% for GP, it sure is an interesting combination.


I guess the question that LPs are asking themselves really is that in PPP terms a $ 200 mn fund in India would be the equivalent of a $ 1 bn fund in US (which pre-2007 was fairly common place), a significant size even the world's largest economy, especially if you are focussed on "classical private equity" (unpolished, unlisted companies). That means a $ 100 mn deal size assuming a portfolio of 8-10 companies (which means company revenues of anywhere from $ 50 -250 mn and PAT of $ 20-30 mn) - not pushover numbers in any case.


Dissecting the onion another way, the micro fund category (sub $ 100 mn) seems grossly under represented, given the fact that this is the sweetest spot in terms of risk-reward (get into companies with minimal concept risk but significant execution risk). However, it seems that the jury thinks it is unviable given the bandwith issues involved in managing the portfolio (I think this is an area that will get changed along the lines of the Silicon Valley model - where you could have a roster of operating partners that devote a part of their time to grooming companies thereby reducing the burden on the fund management team).

Given the current circumstances, I would think the ideal size for an economy like India (which is far more broad based, driven primarily by entrepreneurs, not the Government and hence has a larger range of opportunities) ought to be in the region of $ 200-300 mn.- if one were to marry the overheads of fund management with the opportunities available in the market). Of course, this will also depend on the style of investing (preference of size of stake, operational involvement).

Thoughts, any one ?

~Varadha

Culture of a VC firm

The other day I ran into a peer of mine who works in another VC firm. He casually remarked that the only difference in the performance of VC firms in the Silicon Valley eventually boiled down to the culture of the firm. I was quite bemused with this comment - the rationale being the top VC firms have uniformly "Top decile" talent, access to the same network (with marginal differences that crop up from time to time) and have a hugely overlapping set of smart investors (LPs). So, it eventually boils down to execution (as in any other industry). Of course, the discerning would know that in a small, staff driven firm (as in consulting/mutual fund/hedge fund), it comes down to the culture of the firm:

- process Vs results driven
- democratic Vs dictatorial
- meritocratic Vs gerontocratic
- open, transparent Vs opaque, hierarchical
- hierarchial Vs matrix
- conceptualization Vs execution
- homogenoity Vs heterogenity




There obviously are no easy answers for this on either side. It is a delicate balancing act and the better ones know how to mix and match this concoction according to the needs of the market. A sampling of the behavioural patterns can often give you valuable insights about which way the culture is inclined towards. Similar to what Malcolm Gladwell says in the Blink, the subtle differences are those that can be thin sliced and observed more through guttural signals than rational calls.

For example, how do the sub -ordinates react in presence of their superiors ? Is there a natural deference (through a turning of head towards the superior) after every point they make ? Is there eye contact with the others in a meeting ? Is there a forced fitting of roles based on hierarchy in a meeting ? Is there a complementarity of perspectives or do some people end up cuckoo-clocking what others say ? What deliverables is each person responsible for and is the monitoring process transparent ? Is there discord between the picture the outside world sees of the firm and the self-image the firm has of itself ?


It is amazing to think as to how meeting 2-3 people from a VC firm together/individually for even 5-10 minutes can tell you so much about the firm, its culture, the quality of people and most importantly, the quality of its investments.

Getting back to the beginning, apparently one measure of how VCs benchmark themselves on their culture is on the number of sparks that fly during a meeting - how tough is the questioning on individuals, portfolio companies and completion of tasks; Point certainly to ponder over.


~Varadha
(varadha.r1@gmail.com)