Tuesday, May 20, 2008

Disparate resources - OBS for I-Banking, Pascal's Law for PE investments

We badly need an OBS type initiative to reform our I-bankers.

No matter to what end effect, I see them going for the same kind of dubious deals, reinforcing the herd syndrome that is ruining the industry. Why clamor for liberalization of ECB norms to borrow more and invest in overowned sectors, only to let your client grieve over inflated liabilities if the currency strengthens? Bulging order book of construction companies is one thing, execution capability is altogether a different world. Do that deal just because everyone else is doing it? They won’t do one thing differently until someone else starts a trend. Nobody wants to start off one.

Another reason why I support a OBS initiative in I-Banking industry is their class thinking, a queer kind of apartheid. A few weeks back I was just having a casual discussion on deal prospects in sugar industry with CEO of a leading brokerage in Mumbai. His first reaction was - “which B-School are you from?” I told him I am not from any and I was in for a more baffling second question – “how do you know so much?”

I would blame the recruiters (and partially the effective B-School PR machine) for having spread false notions that helped build several stereotypes. I believe that good investment bankers need to have enormous common sense, the absence of which explained subprime mortgage crisis in the US. Then comes a basic intelligence to quickly grasp facts relating to a business, the dynamics of the industry and a clear idea regarding the resource requirements of respective managements to take it to the next level. Recruiters still don’t have the tools to assess these skills.

You don’t need an MBA for this. What you need is commitment and a sense of probity. Due diligence is all about commitment to client prosperity and NOT a check list of processes to fill boxes in a valuation questionnaire, as it is widely held. I-Bankers should and can learn a lot in between deals. They must develop a sense of curiosity about industries they don’t know anything about. They must learn to Google and expose themselves to the world outside the cube farm. They can’t say they are busy because we know most work in a deal is for transaction lawyers, whereas these guys compile papers and ensure dispatch to regulators, intermediaries or their client and its shareholders. You can’t blame them because creativity has not been part of B-school curriculum. If they develop a bit of heuristics and get creative, they’ll soon realize the depth of their emptiness. They won’t ask questions like “which B-School are you from” in response to purely common sense laden expressions from a curious but committed observer, making a living by sniffing up deals. They’ll begin to feel a sense of shame, springing from realization of the immensity of their own internal inadequacies - the starting point of self reform.

I hope a few of them read this and oblige. If they do, we’ll see more deals from boring segments like commodities, Gems & Jewellery, Auto Ancillaries and processed foods – all industries where nobody pays attention now, where valuations come cheap and are up for grabs. They say PE funds target 25% returns no matter which way the market goes. Ask how many are getting it? Sorry, let me reframe the question – how many are not losing money? Opportunities in stock market are all about attention span. Agreed it calls for steel nerves. Buy into a sector that is under-owned and neglected by all. Sell when everyone wants a piece of it. The commodities sector is beaten so much down and the managements need just financial resilience to weather the down cycle. Soon when it looks up, it sure is going to be a multi-bagger as explained by Pascal’s law in Physics – a small change in pressure is conveyed to every part of a fluid and its surface to create a major disruption. When it does, it won’t be ripples, it would be massive eruptions. Go cash in on that. Have some time to look at something other than consturction, Capital Goods and Infrastructure (and IPL T20 hogwash), where hype masks huge gaps in execution capabilities.

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