Greek Complexity

VC/PE in India vs SE Asia

Interesting piece at VCCircle here. I thought the comparison below of PE in Indonesia to India a few years ago was apt. The writer's estimate of the number of Indian PE funds in the market today is quite extraordinary too.

Another VC investor mentioned in a discussion yesterday -- and I know that he had the same views three years ago -- that although Vietnam presents great opportunities for the canny investor, entrepreneurs there don't yet have familiarity with terminology and structures that VCs are used to in other markets. For instance, in the Vietnamese legal system, loans and equity are understood, but the concept of preferred shares trips them up.

Apropos successful exits

An interesting coincidence. I ranted yesterday about Dave McClure's conclusions about

• the future success potential of large VCs and
• what constitutes a good exit for entrepreneurs in Asia

I had a tiny voice telling me I'd end up with egg on my face for stating my opinions so vociferously. But look what happened almost immediately.

Today someone pointed me to a report by VCCircle about a planned IPO by Just Dial, an Indian directory service.

VCCircle speculates that Just Dial could be looking to IPO at a valuation of over Rs. 2000 crore (20 billion rupees or about $430 million).

Is this a successful exit? Most definitely. The article says that Just Dial had revenues of Rs 134 crore in the year ending March 2010. That means a trailing P/S ratio of 15x when they list. That's not chump change!

Has a large blue-chip Silicon Valley VC made money in this deal? Sure. Sequoia will make a 5x return in two years or less. What has worked in Silicon Valley in the past for the big-boy VCs may not work there in future, but don't count 'em out elsewhere.

Getting your start-up through tough times

Mohanjit Jolly of DFJ India writes another insightful article. To quote just one hard-hitting statement out of many:

Don’t think that the investors can’t afford to shut the company down, or can’t afford not to fund the company. Usually, the entrepreneur loses that game. Instead, it’s best to tackle the tough situations through collaboration, to anticipate the tough times ahead and have a plan to get through it.

How true.

Private equity: "India zooms past China"?

Chest-thumping, statistic-twisting propaganda from India's Financial Express, purports to show that India is Asia's most favoured market for private equity. In January (whether 2006 or 2007 is unspecified), according to the article,

India has emerged as the most favoured private equity destination attracting $1,239.22 million worth investments in January, surpassing Asian giants like China and Japan, a study says. India ranks top in terms of PE investments in January-February and has left behind Asian giants like China with $ 609 million and Japan with USD 980 million, according to a report by Asian Venture Capital Journal (AVCJ).

Link: India zooms past China

How useful such a statistic is supposed to be beyond... no, wait. I can't think of a single situation where such a statistic could be useful. Anyone with the slightest interest in private equity should know that this is an asset class where:

• Investors can be counted in dozens and scores as compared to the millions who participate in the public markets
• Investments are similarly few in number (both because of long due diligence processes and an absolute small number of deals in consideration at any given point)

To then state that one country is the favoured destination for private equity based simply on data for one month smacks of ignorance, incompetence and propaganda. Even if the headline conclusion is attributable to the AVCJ (I suspect not) and not to the FE directly, it is a journalist's job to raise questions, not blindly repeat other people's nonsense.

The same article then goes on to provide the following broader statistics:

Asian PE investments in 2006:

• Australia: $24.9B
• Japan: $10.4B
• China: $7.7B
• India: $7.0B

2006 growth in funds raised:

• Australia: 88.9%
• China: 72.1%
• India: 37.6%

This is why I think most journalists are idiots mindless stenographers who haven't the faintest what they're writing about.

Disclaimer: I have not read the original AVCJ report upon which the article is based. Kind souls who would like to enlighten me further may please email me at blogfeedback [at] murli [dot] net or leave a comment here.

Technorati Tags: private equity, asia, india

Minnows begin to hunt whales

It was only a matter of time and the planets aligning in the correct configuration.

Credit markets are buoyant, private equity's techniques look increasingly attractive to and imitable by corporations, structured finance is scaling new heights of innovation each day, and aspiring giants want to make their presence felt outside their traditional markets. What more could one expect but this? Onward ho, I say.

Link: FT.com / In depth - Small fry stir corporate waters (subscription may be required)

Chief executives are increasingly inclined to plot bids for companies that are far bigger than their own, thanks to the availability of cheap debt and creative structures devised by investment banks.

In recent weeks smaller companies in several sectors, surprising many investors with their audacity, have made bids for larger rivals that they could not have pursued in earlier times.

The moves, mainly made in the US, highlight how the world of debt-fuelled deal-making has expanded from its traditional practitioners in the private equity industry.

Now it also includes publicly traded companies with aggressive mergers and acquisitions strategies.

Technorati Tags: banking, structured finance, private equity, finance, M&A

Private equity = conglomerates?

The Economist has an interesting article pointing out that calling today's biggest private equity firms conglomerates isn't too far a stretch, notwithstanding firms' aversion to the appellation. The distaste comes from the conglomerate structure not being in fashion for the past 25 years (in the US, not Asia; large Asian companies are often byzantine setups) but looking at the question purely from a linguistic point of view, it would seem that private equity firms are conglomerates. There really isn't too much more to say on the topic but it's an interesting read with some notable titbits, so go take a look.

---

An aside: I usually put links like this on my radar, and my radar gets spliced into my main RSS feed. So I'm in the funny position of having a richer RSS feed than a website. The bottom line is that you should probably use my RSS feed or my email newsletter to get updates :)

How to sell businesses

An insightful article on AltAssets on how to sell businesses, even lemons. Summary (but do read the complete article):

Tell a coherent, credible story that seamlessly takes the business from the past into the future. Pitch the business appropriately for the intended purchasers. Beware the disingenuous over-bidder; they are often the worst of all time wasters. Agree a process to allow the purchaser to get comfortable with the risks of the business. Look well ahead as well as at the road in front of you and know when it's best to do nothing. And, remember Akerlof's Nobel Prize and "The Market for Lemons": Where information is asymmetric, if you don't know what you are doing, there is a very real risk that an asset won't sell, whatever the price.

Link: How to Manage a Private Equity Sale Process: "The Market for Lemons"

PE techniques spill over into public companies

In today's Telegraph is a piece about European public companies imitating the techniques of LBO houses.

Anything you can do, I can do better. That, at least, is the attitude of some European public companies to the headway being made in the deals business by leveraged buyout houses.

It seems some public companies have piled on debt in their pursuit of returns-enhancing deals. The author cautions against this.

But is this something very new? In the M&A class I am taking at grad school, I've already come across a couple of cases where companies had the option to pursue leveraged recapitalisations and acquisitions. These cases weren't particularly recent. The only thing I can think of that might make a difference is that the cases we studied were all US-based.

Link: Public companies ape the private equity houses at their peril

Asian PE growth to continue

A (leading) indicator of growth in Asian private equity points upward -- Asian PE outfits are hiring senior bankers. PrivateEquityOnline:

[PE's] hiring spree is taking place as investors target the fledgling Asian private equity markets in search of higher returns than they could achieve in the US or Europe. Last year, Asian private equity fundraising topped $10 billion, compared with $3.3 billion in 2003.

The only way to go is up: even having tripled in one year, there's plenty of room for growth in Asian fundraising. For some perspective, consider this tidbit from AltAssets:

The Carlyle Group, for example, closed a $7.85bn US fund and a $2.2bn European fund. Goldman Sachs, the global investment banking, securities and investment management firm, has reportedly raised the largest private equity fund to date, with $8.5bn in commitments.

Blackstone and Warburg Pincus are both some way down the line with their latest vehicles, expected to be in the region of $10bn and $8bn respectively.

Although there are bound to be hiccups (regulatory/political ones, for instance) and pockets of slower growth, the overall trend is going to be one of increase.

Watch this space.

Service to rate private equity funds launched

Yet another development towards standardisation in the PE industry (apart from this one, for example).

Cogent Analytics is a new division of Cogent Partners, a Dallas-based investment bank best known for its secondary advisory work. The new group plans on providing institutional investors with standardised reports on existing and proposed private equity funds, ranking each on a scale of one to five, with five being the best.

The ratings system, to be officially announced soon, will include a service that monitors partnership investments for LPs, ascribing a number to funds with regard to historical as well as projected performance. Called CORE Reports, LPs will receive, among other documents, a one-page tear sheet each quarter with standardised historical return analysis on one side and standardised projected return analysis on the other. On the top left corner of each side is a blue number – say, 3.5 – that, claims Cogent, distills more than 20 types of risk and return analysis.

Another service to be launched by Cogent Analytics could also have major implications in the private equity fundraising market. Called GP Screen, the service involves Cogent producing a roughly 50-page write-up on a particular fund in the market. The report, paid for by the LP not the particular GP concerned, assigns quantitative measures to many fund attributes. The group offering the fund is rated on historical performance and partnership terms, but also on “strategy” and “team”. Cogent Analytics asks the same sets of questions of each group: for example, how are the economics distributed among the professionals; how long has the team worked together; how has deal sourcing changed; has strategy shifted over time?

I read the article and thought of investment consultants such as Cambridge Associates, who have been doing similar work for a long time. (CA, for instance, provides endowment funds, trusts, pension funds and other investors with information and advice on choosing money managers.) But there are two main differences between a Cambridge Associates and Cogent Analytics:

• Investment consultants primarily perform custom analysis for each client whereas the Cogent Analytics service seems almost like a Moody's for PE funds.
• Investment consultants have a broad brief of which PE is only one component.

So this is quite interesting. Their website makes no mention of rating venture capital funds. I'm guessing that would be much harder (more subjectivity?). And even if they did rate VC funds, I would imagine that the ratings would be more volatile than those for PE funds.

Link: PrivateEquityOnline.com Newsletter