Success in PE ?1

Like they say deal-making is about managing 3 E's - Egos, Emotions and Expectations, this wonderful piece of article I came across in the blog The Private Equiteer throws light on what is needed in a mid-market PE fund. For once, I have very little to add except to shamelessly plagiarize the link and post it.

As said elsewhere in the post, the recipe for success is to be truly amiable and tenacious. PE deals take a lifetime to complete (in the context of finance where trading can make you as much in a month if not a year). Softer aspects like rationality, friendship, temperament and a X-factor (what does the team think of you ? Go or a no-go ?). I have been in situations where the sheer patience and ability to hang in there to the relationship has been a deciding factor for either side (assuming of course the price is in and around the fair zone - no one is a sucker). Sure, you may not consummate anything but the mindspace one occupies is sure to guarantee you a look-in in the future as well.



On the stuff about portfolio management, can't agree with the stuff any more. Remember you are only a general physician - so please do not get into cardiac or arthritic territory. Acknowledge your lack of expertise (self-deprecate and direct them to a specialist) and focus on generic issues which can be de-constructed easily (people, systems, process issues than technology or product or market dynamics). Remember no physician ever held onto a patient (and his trust) by monkeying around with his health !

~Varadha
(varadha.r1@gmail.com)

Dr. Jekyll Investor & Mr. Hyde Manager

One of the great many chasms that every single PE manager worth his salt has to go through is to figure out the delicate balance between the role of an investor and a manager without becoming disruptive.




How deep does one dive in ? How strong does the understanding of the organizational DNA have to be ? How strong should the technical/domain knowledge be ? For a relationship to blossom into one based on deep trust and commitment, the PE investor needs to move beyond the role of an investor who can bring in generic perspectives and become a trusted confidante; Being a trusted confidante automatically means ability to add value to the technicalities of the business/organization as also to the "mental orientation" of the promoter. May be the investment manager needs to ask himself if he can hold fort should the promoter vanish for 6 months which would mean answering the following questions for oneself:

• Do I understand the business in granular detail ? Sales structure, organization, productivity, sales cycles, supply chain, mark-ups, commercials, quality issues, customer expectations
  
• Do I understand the organizational DNA ? Is it driven by individuals or teams ? What are the motivation levels amongst lower rung employees ? How strong are the company's processes and systems when compared to its peers ?
• How is the market place evolving ? What are competitors doing that we are'nt ? What stage of the curve is the industry going through- early growth, heavy competition, consolidation or mature growth ? How well prepared are we for the next phase ?
  

An investor's role as a manager is like what someone said " it is not that you would, but you could". It is my firm belief that as one starts thinking about these, the value addition on business specifics tends to flow automatically strengthening the relationship that exists. Contrary to popular belief, I tend to believe that being an investor and a manager are not two different roles at different points of time. A good investor needs have a realistic managerial perspective and a strong manager needs to understand the way an investor sees things - you may be running the most salient business on earth, but if you cannot carry along your investors with you, it does not mean much.

~Varadha
(varadha.r1@gmail.com)

What to look or in a VC ?

The recent news article about LPs getting increasingly disenchanted with their emerging markets portfolio is at odds with the bull run in the capital markets. I had talked about this in my earlier post - about the imminence of consolidation in the PE market in India. While this shake-out is going to inflict a lot of pain all across in the medium term, hopefully it would lead to sanity all around in the long term.

Getting back in line and continuing from the last post, I thought it best to do a critical self-appraisal of my brethren. So, what are some of the aspects an entrepreneur (or an investment banker) should look for in a VC during the limited interactions they have ?

• Understanding of business & appreciation: Is the VC giving you undivided attention during the meeting ? Does he/she come across as one who is willing to learn about your business and appreciate the finer aspects ? Can he understand the business beyond just numbers- CAGR, EPS and the like ?
  

• Communication: The same point I had outlined in last week's post holds true here. If he cannot pick up calls/respond to mails and convey decisions unequivocally and on time, how can he hold water for the long term ? What is the reputation of the person you are dealing with in the market ? Is he known to be not temperamental, rude and professional ?

• Relationship vibes and passion to build a business: Is this a guy you can get get comfortable with personally ? Will your team be comfortable interacting with him ? Is this person a shoulder you can cry on should times turn bad ? The easiest way to ascertain this is to look for anecdotal evidence from the VCs side of having added tangible value in their portfolio. A lot of inward looking entrepreneurs would rather have a passive financial partner than an activist, high-maintenance VC. The smart ones look beyond the pester (much like Socrates did with his wife Xanthippe) - "If I can tolerate her, I can attach myself to every human being else."

In summary, some of the best relationships are informal and between two level-headed people who have no qualms in disagreeing yet share a collective vision.

Regards
Varadha

varadha.r1@gmail.com
+91 9940670064

The Curious comparison of Private Equity and Bagger Vance

Apropos the comment on value addition in one of my earlier posts is well taken. Agree to the fact that as long as the promoter treats you as a partner and there is a high element of trust and transparency in the relationship, there are not too many reasons why the marriage (PE infusion is is a marriage) should fail.

I would like to believe that a PE fund is similar to the support crew for a marathon runner or a caddie for a golfer (could not help comparing it with the movie "The Legend of Bagger Vance" I saw the other day). The comparison does sound a little corny, but here goes nevertheless...



Not too dissimilar to the relationship between Bagger Vance (Will Smith) and Junuh(Matt Damon), the relationship is not permanent, but not fleeting either. Ultimately, it is the golfer (read promoter) who calls the shots. The Caddie's core job is to carry the golf kit (and in the case of capitalism, bags of cash ! - argh, that was quite tacky, wasn't it ?!).

The caddie can only help exorcise demons in the minds and bring in perspectives that otherwise might elude someone who is focused on his job. So what does a caddie bring in ?

Peripheral vision: What are your other competitors doing ? Is there a better way to do what we are currently doing ?

Order and discipline: What is the best way to position a ball before hitting ? How would you want to proceed on taking into considering the terrain, weather and the competition ? Who keeps track of the spoken and the unspoken ranging from body language to quality of each shot to hits and misses ?
Confidante and sounding board: Temperance of of the highs and lows of essential are necessary for consistency of performance. Often, a person who is emotionally attached to his sport might find it difficult to distance himself from it. It is the caddie, who serves as the shoulder for the golfer to lean on, during times -good and bad.

Suffice to say the golfer knows his game better than the caddie (otherwise why would the caddie be a caddie, after all ?). We must remember that a caddie is not indispensable but often can lead to that marginal extra that can prove decisive in the long run.

What say readers ?

Varadha

(Varadha.r1@gmail.com)
+91 9940670064