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Luis Miranda

Private Equity doesn’t like Transparency

One of the challenges the local VC and PE industry faces is that the interest of overseas fund investors (i.e. Limited Partner / LP) to invest in India is very low. This is because of a host of factors:  some of them being alleged poor returns, a depreciating rupee and the shutdown of the government in terms of decision making and passing relevant growth-focussed legislation. So the past couple of years have been bad, making me realise that I did not miss much by staying out of the industry during this period. But things are turning around and my friends seem to be busy closing new deals and exiting old ones, even though the IPO market is long dead and there is gloom and doom all around (notwithstanding India winning 6 medals in the Olympics and the Chicago Booth’s Raghuram Rajan moving to India as Chief Economic Advisor … you can see how badly I am clutching onto straws).

This time I will look at the allegation that Indian VC and PE has underperformed because this is an area where fund managers have some control over. Maybe it has underperformed. But the data is suspect. Most performance reports are based on data collected by media organisations or industry consultants. There is no transparency on how these agencies get the data or analyse it. A few months back I was on a jury to decide on the top performing funds in India and we quickly realised that the data we were given was full of errors and incomplete. So we had to throw it out and look at proxies, based on our anecdotal experience – not an ideal situation and packed with biases. And friends continue to complain that the data does not reflect the true performance of the industry’s performance which they, obviously, believe is actually doing better than what the data shows.

The problem lies with the industry. We need to take charge of the data. And this is not a problem with the Indian industry only.  I used to be on the boards of two industry organisations – India Private Equity and Venture Capital Association (IVCA) and the Emerging Markets Private Equity Association (EMPEA) – and there was opposition at both to compile authentic industry data. I believe that this was because members felt that they would look bad when compared with others, especially since everyone claims to be performing in the top quartile. The problem is that LPs will continue to benchmark fund performances against the industry and they will use faulty data – data that the local players have no control over. On one hand, the industry data may be overstated because poor performers will not voluntarily submit data to these data collectors. On the other hand the industry data may be understated or not analysed properly because the data collectors are comparing apples with oranges (something we noticed when we were trying to analyse the data on that jury).

I used to argue that the IVCA should take the lead in publishing industry performance data in aggregate data because it (a) adds more credibility to the data, (b) it gives the industry some control on how the data is reported (I am not talking about doctoring the data!) and (c) it enhances the role of the IVCA. But this was always voted down and today no one is interested in doing this. Take a look at USA’s National Venture Capital Association (NVCA) website – it carries a host of statistics and research and NVCA partners with various organisations to publish performance data. Why can’t the IVCA do the same? If you Google ‘IVCA’ you first get a message “This site may harm your computer” and there is not much performance data on the website.

Of course there will be challenges initially. When NASSCOM started collecting data years back, a few members were notorious for giving fake data … but that got corrected over time because of peer pressure, etc. All that IVCA has to do is to partner with a reputed organisation (domestic or overseas) who will ensure confidentiality of data and proper analysis. Only then can we say that the data is accurate and stop whining about LPs making decisions based on inaccurate data. LPs, like fund managers, need industry data; and LPs will continue to rely on proxies until the real McCoy shows up.

The VC and PE industry loves to talk about why portfolio companies need proper governance and better transparency. Isn’t it time that we ourselves walk the talk and be more transparent about the performance of our industry. I believe that this transparency will in fact help the industry raise more capital and IVCA has to take the lead.

(I look forward to having an online discussion on these issues – so please continue to write in with your comments (the guys at Forbes still need to be fully convinced).  I spent over a decade in the private equity industry and enjoyed the excitement of working with great colleagues and partnering exceptionally brilliant entrepreneurs to build India’s infrastructure. We had a great ride, but sometimes we got it wrong! I am now experimenting to see how we can transfer the lessons I learnt, and did not learn, in the for-profit world to the incredibly  passionate and brilliant social entrepreneurs I now hang out with; the aim is to build sustainable organisations without destroying the soul of their NGOs.)

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Potential Domestic LP
I do believe there will be another emerging class of LPs here in India as the pool of domestic capital under institutional (and semi-institutional) management grows. Having robust data is absolutely critical to developing this pool: for them PE will potentially not be a small fraction of their "international equity" allocation but rather an asset class that could compete (with their semi-allied businesses) for allocation on a more material and hopefully less cyclical basis. There is a fair amount of cynicism now on both sides of this trade, but good data can make a big difference.
Luis- Back in June 2012, here in Silicon Valley; Steve Kaplan made a presentation on PE Fund performance and reasoned why a new indicator such as Public Market Equivalent (PME) might be a better approach to measuring fund returns. During that analysis, he mentioned that even in the US, where we have better transparency, the two of the most prominent data sets used from companies such as Prequin and CA, there are several holes. His point was that; there's lack of high quality data even from the data-sets that are norm in the PE industry. Out of 27 PE partners and principals sitting in the room, only 1 firm used Burgiss which their paper cites has the highest quality data. So my point; what you cite as a problem in India has masqueraded as selection bias for other mature PE markets. Nevertheless, for India; I don't see why the GPs would continue to have a free hand in this.
Satish Mandhana
Valid issue. For a change, number of PE VC firms who have now signed up with Cambridge Associate in India has now reached a mass where the agency has requisite number of participant to produce reports on India performance alone. IVCA has been working with the agency to help increase the number of participants in its survey. PE VC industry has reached a maturity level where there is a greater confidence in its reporting of deals and fund raising details. However, it's still a long way to go in terms of reporting of exit and performance details and IVCA is trying to persuade its members to do so and hopefully peer pressure now, should expedite the same.
Well stated, Luis. You have defined the problem and yes, there is a dire need for reliable data to gauge the actual performance of GPs in India. IVCA has strived to address this issue zealously over the last couple of years with some degree of success. I agree with you that a lot more needs to be done. Major headwind here is the nature of this industry. Most of the players are not listed and hence there is no regulatory compulsion for full disclosure. At NASSCOM, data credibility improved as more and more players got listed. I therefore remain sceptical whether IVCA can radically improve on the data authencity from the current level of efficiency. And certainly not for lack of efforts or focus!
Rohin Dharmakumar
Luis, a tough ask! Given that risk investors of all types - VCs, PEs and hedge funds - are seeing a crisis of confidence internationally, do you think India can offer any better answers? I'm basing this on compelling research that has come out in recent times, notably: (a) The Kauffman Foundation on VCs - "We have met the enemy...and he is us" - http://www.kauffman.org/newsroom/institutional-limited-partners-must-accept-blame-for-poor-long-term-returns-from-venture-capital.aspx (b) Simon Lack on hedge funds - "The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True" - http://blogs.reuters.com/felix-salmon/2012/08/08/why-investors-should-avoid-hedge-funds/
 
 
Luis Miranda
Luis Miranda started investing in India's infrastructure before it became fashionable. He started IDFC Private Equity and was earlier a part of the start-up team of HDFC Bank.
Luis has invested in and has been on the boards of companies like GMR Infrastructure, Delhi International Airport, Gujarat Pipavav Port, Gujarat State Petronet, L&T Infrastructure and Manipal Global Education.
Today he is involved with various non-profits like Centre for Civil Society, SNEHA, Human Rights Watch, Gateway House and Samhita Social Ventures. Luis graduated with an MBA from Chicago Booth.
 
 
 
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September 03, 2012 23:29 pm by Potential Domestic LP
I do believe there will be another emerging class of LPs here in India as the pool of domestic capital under institutional (and semi-institutional) management grows. Having robust data is absolutely critical to developing this pool: for them PE will potentially not be a small fraction of their "inte...
August 20, 2012 02:04 am by Nilesh Trivedi
Luis- Back in June 2012, here in Silicon Valley; Steve Kaplan made a presentation on PE Fund performance and reasoned why a new indicator such as Public Market Equivalent (PME) might be a better approach to measuring fund returns. During that analysis, he mentioned that even in the US, where we have...
August 18, 2012 09:28 am by Satish Mandhana
Valid issue. For a change, number of PE VC firms who have now signed up with Cambridge Associate in India has now reached a mass where the agency has requisite number of participant to produce reports on India performance alone. IVCA has been working with the agency to help increase the number of pa...
August 17, 2012 20:41 pm by Sanjiv Kaul
Well stated, Luis. You have defined the problem and yes, there is a dire need for reliable data to gauge the actual performance of GPs in India. IVCA has strived to address this issue zealously over the last couple of years with some degree of success. I agree with you that a lot more needs to be do...
Rohin Dharmakumar
Rohin Dharmakumar
August 13, 2012 13:29 pm by Rohin Dharmakumar
Luis, a tough ask! Given that risk investors of all types - VCs, PEs and hedge funds - are seeing a crisis of confidence internationally, do you think India can offer any better answers? I'm basing this on compelling research that has come out in recent times, notably: (a) The Kauffman Foundat...