Wednesday, March 04, 2009

"ICICI Venture is lying"

Just finished reading this BS report – “PE firms to rethink India strategy”. I say, “they had better” !

The report quotes Vikram Uttam Singh, Head, PE advisory group of KPMG “The Subhiksha incident will make PE firms more cautious on how much of a free hand they allow to a promoter. Some PE funds are concerned that promoters have a wide range of authority in their companies and could look to establish structures that limit some of this authority”.

Here are my observations.

KPMG may have compulsions to take sides with PE firms as their survival depends on such clients. But why does it credit PE firms with so much of naiveté? ICICI Venture had an exposure of 33% in Subhiksha of which it off-loaded 10% to Azim Premji’s PE arm (Zash Investments) for Rs.230 crore – apparently without discussing with Subhiksha itself that was badly in need of cash.

If the same money (Rs.230 crore) was introduced directly into Subhiksha, (instead of buying out ICICI Ventures stake), the company could have been saved to an extent. But I-Ventures wanted to lighten its holding and thought otherwise.

While it’s ok for PE firms to cash out, they need not profess their ability to have long term relationship with their portfolio companies and the “strategic managerial edge” their presence in the Board offers to such companies. When that is the case, what was Ms.Renuka Ramnath (one of I-Ventures nominees on Subhiksha Board and CEO of I-Ventures) doing when she approved the proposal for massive scale up by Subhiksha? Now is she telling us she was not aware of it, even as I-Ventures had the rights to appoint majority of Subhiksha Board? Or does it mean she was too busy to attend Subhiksha Board meeting where such a critical decision was made? Or is she admitting I-Ventures had no monitoring mechanism over its portfolio companies? That’s a bit too much. If I were a LP investor in I-Ventures, I would have taken it to task and would proceed against them for dereliction of duty. A bit too naïve. She certainly can do with some education on sophisticated lying.

Just as in the case of Subhiksha, the first thing PE firms do when they sense trouble is (a) to quietly off-load their stake to an unsuspecting investor and (b) withdraw its nominees from the Board so that they need not defend lawsuits filed against them by unpaid creditors/ bankers / statutory authorities like EPFO in this case.

In simple terms, PE firms are pure fair-weather friends. All talk of strategic advisory services and expertise all are pure bunkum. They have none and they are here just to skim the profits. At the slightest sense of trouble, they chicken out – like the proverbial rats from the sinking ship.

Nothing wrong absolutely. Buy why not say it upfront? Why the façade of management expertise when you know you have none? Why not tell the portfolio investors - “Take the money and pay us back 10 x returns. In case if you goof up, you’re on your own” !

And lastly about KPMG and its ilk of PE advisory groups. How come all those transactions advised by these so-called whizkids yield a negative return soon after the transaction? Are they whizkids or half-baked, mother fucking scumbags that shamelessly face the media and talk ill of the companies they ran a due diligence on and arrived at a "fair market value"? If after all their “expert” due diligence, their projections go haywire, should they not re-examine their processes and find out what’s going wrong? How long should the investing community put up with such sobs that are ready to even chomp client carrots if there is the word "fee" at the other end?

Why would they? They have mastered the art of orifice-licking and carrot-chomping. That should keep them in good stead besides the standard disclaimers that insulate them :-)


wearesubhikshaemployees said...

I really dont want to comment on your views for ICICI ventures and Renuka Ramnath. What I would like to tell you is that Subhiksha was always managed in a very shady manner and R. Subramaniam has to take all the blame for it. His intentions have always been dishonest and this is now known to the entire world. He wanted to sell this stake for much higher valuations because that was the only thing he had worked on for past so many years. If one has to divide the blame for Subhiksha debacle, it is 80% to the promoter R. Subramaniam

Samuel said...

About your general perspective of PE backed firm valuations going down after purchase, isn't that also affected by the J-curve and not purely imperfect valuations? Valuations might have also been hyped up in the past bull market, and most recent term performance might have been negative due to overall market and economy conditions, but to generalize all PE valuations as rubbish - I wonder if that really holds water.

Krish said...

Thanks for your comments, Samuel...

The whole point of my post is to emphasize the callousness with which valuations are arrived at by I-Bankers and issuers where the thrust is on who can push how much down as many a unsuspecting investor's throat. Your point of expanded valuations in overheated markets is indeed a risk assumed by the investor, but in the case of Subiksha v.I-Ventures that I had based my view on, this has hardly been the case. And this is not the first such case because I-Ventures did this with Air Deccan investment as well when it was forced to exit at a massive loss. It's a case of a large PE firm disowning its responsibility (after locking all its rights down in fine print in the term sheet) when the bets seem to have gone horribly wrong.

That's not maturity and hence my ire.