Saturday, August 26, 2006

One Swallow a summer maketh...?

I’ve been following a spate of Private Equity funds coming into India with Fund Managers (FM) who were previously successful local / expat entrepreneurs. Most of them have just one success story in IT, Consumer Internet or ITES. So far so good. Others are even worse. They have good academic track record complete with an Engineering degree from IIT and a B-School MBA. But how do brilliant students qualify as good FMs….? ( Warren Buffet, George Soros, Donald Trump never went to a B-School. B-Schools went to them with their honorary fellowships once they proved their mettle. ) I doubt. Not at least by what we get to see on ground. FMs are a breed by themselves who should be adept fundraisers, excellent turnaround strategists endowed with powerful team building and execution skills, early sensors of an opportunity and well, a clear futuristic investment logic to enable high IRR exits from a portfolio of investee companies. In short, the LPs who trusted them with their funds should be coming back to them in droves with loaded moneybags.

Here’s why they failed to connect.

Entrepreneurial success comes from deeper commitment and the constant prodding from within. One has to make it with little resources to boot and constantly in a pressure cooker atmosphere. The problem here clearly is of scarcity. But as a FM, he has a different set of variables to contend with. In fact, a good FM has a problem of plenty. Having raised his money from LPs who are left with little or no fresh asset classes to invest, the FM has to spot new investment opportunities. Unfortunately, the PE managers have neither any previous investment experience nor have they practically any clue about it - except what they have read in B-School courses which they post regularly in their blogs. I have read some of their blogs and almost all of them betray their essay writing skills than investment logic. They have shown alacrity to post news on their recent investments ( as if they were doing a favour on the LPs ) and went on with their post investment blah blah…! Perhaps these posts were their way of communicating to their LPs their weird logic ( or the toal lack of it ) which the GPs don’t allow them to beef up their internal reports with.

The point is B-Schools train them to deal with problems of scarcity and if they are suddenly left to deal with a diametrically opposite problem of plenty, they are lost. Its altogether different that they hate to admit this. They have egos as large as all outdoors. I wonder whether it is part of their package. Do their GPs say something like this while these FMs are selected… “ Oh, yeah, you got your B-School degree from the 1st world…now go manage my funds in the third world emerging markets…here’s your appointment letter and don’t forget to pick your load of Ego from the garage below “ . That explains why almost all FMs have one common refrain – “can’t find good investible ideas”. Goddamit….they don’t know where to look and what to look for. There’s a famous Indian proverb when translated means “ If you don’t know to dance, blame the floor”.

Then who will connect….?

The best way to select a good FM is by searching for his knowledge about the local industry, public policy, investment rationale, Market characteristics and the like. Ask him if he were to invest a million dollars of his own money today, where would he invest and why…? Most of the FMs of today would fail this test. B-Schools have taught them to use Stock and Index charts, CAPM models, Portfolio management techniques which they would rely upon for they don’t realize that they are being hired to invest for tomorrow and not yesterday. These are tools which rely on historical data and not on future. They are pretty much useless.

My piece for FMs. The best way to survive as a good FM is to gain skill of insight. This is indeed a tough task. But you are in a game which isn’t really easy. To develop a sense for an opportunity is by constantly interpolating the metrics of judgement with your own clear inner vision. Keep benchmarking this vision with the way future unfolds and keep correcting the deviations as you coast along. This may not guarantee the emergence of a visionary just yet, but you would surely be humbled by your mistakes and the load of ego is off your back. The game gets far more easier because you begin to work hard.

Like Edison quipped “ Opportunity is missed by most people because it is dressed in coveralls and looks like work….!”