The moderator:
Karan Khemka; Senior Principal, The Parthenon Group
The panel :
Rahul Bhasin; Managing Partner, Barings PE Partners
Nainesh Jaisingh; Managing Director, Standard Chartered PE
Satish Mandhana; Managing Director, IDFC PE
Aluri Srinivasa Rao; Managing Director, Morgan Stanley PE
Vishal Sharma; Managing Director, Tuscan Ventures
K Thiagarajan; CEO, Maytas Properties Limited
The session started with a formal presentation by Karan Khemka informing the audience about the niche Parthenon was consulting both the Investors and the Invested in Private Equity space.They help Invested companies realise their true potential , utilize effectively the capital and the help the PE firms with due diligence .According to him PE helps validate the promoters/entrepreneurs in the business world and propels them into the next level of scalability . Promoters open up till now tightly held control and hence Trust between two parties is a key ingredient . This alliance is as dynamic and colorful as the courtship and dating rituals in our personal life.
Two case studies presented by him further explained these points
Key Takeaways for Entrepreneur /Promoter from his presentation
1) Find out true potential of the business you run, although you may never realise it.
2) Build a framework to measure performance rather than blindly adhering to targets
3)PE money usually looks for 4x returns
After this Karan put the first question to the panel:
Does Private Equity add value to India Inc's business practices?
The panel members from PE background agreed that most promoters often ask them if you could value to my business you would do it yourselves.
Rahul Bhasin pointed out that they retain around 12 firms for various services to help out the invested companies while Vishal pointed out that they hire almost all people with operational experience and do have an operational business, but he said they can do it only because they are very focused on one particular sector (Logistics).
They were us general consensus that the PE team adds value primarily in corporate finance , financial engineering ,defining inorganic agenda and corporate governance.
Rahul pointed out that creating right incentives ,KRA's ,alignment is an area where almost every company consistently gets it wrong and there are very few exceptions.
Barings PE partners are a very old firm (estd 18th century) and they have created a compendium of mistakes which helps avoid repetition of the mistakes under similar circumstances.
Responding to a question on when there is a disagreement with a promoter , the panel pointed out that they develop a framework to be used for agenda setting and this helps in bringing the discord in perspective, but taking to the the extreme like having everything penned down in black white is battle lost .
Another common opinion of the promoter that the panel encountered was that he was taking a 10 year view whereas PE is in the 3-5 years horizon . It was pointed that PE usually also takes a 10 year view in sense that though they take a 5 year view they need to exit and here the entity buying from them also takes a 5 year to set a price .Hence they need to take a 10 year view for a good exit.
In this context Rahul pointed out a tests he uses to avoid such conflict.
Test 1: Do we really know this business and can transform it.
Test 2:The shopping mall test: If I run into the promoter in a shopping mall will I go forward and be glad to meet him?
Test 3: Can I disagree amicably and professionally with this person
If any of the above answers is in the negative they don't invest.
It is very difficult situation to be in if there is a conflict and it constitutes promoter interest vs company interest, and Vishal pointed out that when in hole stop digging and get out.
When asked whether any invested company has told them they were too active .
The panel agreed that is never the case as in everyone is short staffed.However they are told so in a scenario where they pull a an underperforming member.
Rahul pointed that they usually need to put in as much work it takes not how much is requested for . Nainesh said depending on the limited bandwidth they have clear agenda setting on what roles the PE firm would fill in.
Karan tabled the second question,
Are family and other emerging business opening up to a PE as a source of investment?
The panel agreed that we have come long way as to how PE is perceived by family business(acceptance has gone up significantly) but still many family business are exploring the role of PE and now they have a few examples to look at.
A family business it was pointed needed to have a competency mapping done, approach its affairs in a professional way and have clear succession planning in place before starting to look for PE money.
The PE firms look for one person as a driving force in the company ,may be a father son but they avoid if they have too many relatives driving it in different directions
They also pointed out that sometimes PE money is used by a single member to settle family politics and drive the board composition in his favor.
The third question was tabled
Do PEs bring corporate goverance into invested firms?
Most of the corprorate goverance we see today especially in Indian context is brilliant packaging.
The promoter can always beat the system the question is will he do it?
A promoter who is a long term player with a willingness to learn will ususally detest from bad goverance policies
The munnabhai test: Check if he is fair to people normally ,even to people who dont matter to him much,then the promoter can be trusted
The panel had come across many instances where violations were excused by promoters as saying it cannot be avoided. Do not take refuge in it
Most of the regulation today is cloaked and leading to a breed of disinterested directors rather than responsible independent board members.
When the panel asked the Grant Thorton representative from first panel,Harish HV, whether he has ever come across an indepent audit committee , the answer was never and dont expect to come across either.
Vishal pointed out that lack of coprorate goveranace was not Indai specific , infact it existed across the world even in US. There is a normal distribution of people. The best remedy is do your due diligence and then pray
Rahul's closing comment :PEs ususally get many things wrong hence the industry has a high mortality rate
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