- Difference from venture capital:-The difference is mainly that VCs are at a much earlier stage, and often take a strategic minority stake. While PEs take a usually majority stake(except in India where they are compelled to go for strategic minority stake) in mature companies in high growth sectors. In the technology space, there is ample overlap but otherwise one would find PEs in any high potential sector but VCs are more of 'smart money' concentrated in technology sectors
- Linkage with consultants and investment bankers:-Interestingly, as a Linkedin search would show, Indian PE employees are mostly drawn from consulting firms and investment banks. A reason is that investment banks help in sourcing deals and exiting investments(via IPOs), while consulting firms help in strategic roadmap/due diligence of portfolio companies etc. Depending on the sector of the PE firm, both these skills sets matter, and so the revolving door exists.
- Reliable Data on sector:-IVCA Report coauthored by Bain & Company(http://www.indiavca.org/IVCA%20Bain%20India%20Private%20Equity%20Report%202011.pdf) and KPMG annual report on private equity(http://www.kpmg.com/IN/en/IssuesAndInsights/ThoughtLeadership/Return-from-Indian-Private-Equity_1.pdf). Both reports have different perspectives on sectors and returns, and give a good insight into the state of private equity in India. Otherwise, newspaper reports often come on that
- The money:-Base pay is quite decent, but the real money is in the 'carry'-i.e 20%(usually) share in the net profits on the deal. Depending on sector, carry takes 5-10 years to be realized(the trend is now on the higher side due to underperforming capital markets delaying exit), and the share goes to the deal team that worked on the transaction. Hence, long term approach matters!
- Few lumpy transactions:-Even a firm like KKR with 35yrs in the industry(it was setup in 1976) has done just 195 investments at a transaction value of $445bn. Hence, it is certainly not like trading with a large transaction turnover. The reason for the lower deal volume is scalability(the holy grail of PE), demanding high investment value(usually not below $50MM in India) and need for greater due diligence since it is an investing decision, not a research decision!
- India specific regulatory and legal issues:-Thanks to the existing securities/financial law framework, things like hostile acquisitions, LBOs, exotic structures etc are easier said than done. And when it comes to sensitive sectors like real estate, retail, media etc, the extent of scrutiny is much more for foreign funding(source of PE funds in India), with the accompanying restrictions on FDI etc. Hence, seeking alpha from clever financial structuring is more difficult here. And with the recent court battle(in the Maharashtra Scooters case, Bombay HC) about the validity of put options on listed equities in shareholder agreements, such controversies are live and kicking.
- Demographics driven sectors:-As the recent runup in the stock price of Hindustan Unilever(and Jubiliant Foodworks) shows, the consumer goods boom in India is live and kicking. And thanks to the telecom reforms underway, there is hope for the digital divide to be finally bridged, and the present USA internet boom(Facebook/Linkedin/Groupon/Zynga) to catch up in India as well. But that is B2C. In the B2B sectors, realty among others, is expected to benefit fro the urbanization and infrastructure development spend, IF it can get its governance in place.
- Investment Committees:-He who pays the bills calls the shots. Investment committees are often offshore(Singapore/Hong Kong/NY/London) situated where the fund raising happens, and many Indian branches of PE firms still need case-case signoffs. Even for hiring, this dependency is reflected. While it is a good thing for transferring the investment process rigour to the new Indian offices, those with more experience may chaff at the reins.
- Bank backed distressed companies crowding out PE:-While Indian firms are not flush with cash like the USA firms(barring Reliance Industries/Piramal Healthcare), the banks more than make up for that. Even basket cases like airlines, steel companies etc often get away with a CDR without having to take drastic changes/reduce promoter equity substantially. Hence, PE companies specializing in turnabouts, often find that banks do not permit the companies to fail!
Sunday, January 22, 2012
Private equity careers in India-pros and cons
This time of the year is when final year MBA students in India must get away from the 2 year vacation on campus(just kidding :P) and make up their mind about career choices. For those in the higher ranked campuses, there are options on buy side in campus itself, but even for others, especially with work experience, the off campus route may yield results in later years. While researching for making my own career choices, I did some homework and just want to put those insights below, so that others can benefit from the same. A small request-if you benefited from this, do comment below or share it so that others can also benefit from the same. I hope that readers would atleast read on Wikipedia/do a basic Google also.