PE GPs acquiring LPs – what does it suggest?

Recently Carlyle announced the purchase of Dutch asset manager AlpInvest Management from its anchor investors APG and PGGM pension funds. APG and PGGM Agree to Sell AlpInvest Partners to The Carlyle Group and AlpInvest Management

AlpInvest is considered one of the world’s biggest PE fund manager with USD 43.3 billion AUM and these two dutch pension funds as the main investors. Even though these pension funds have given commitments of around USD 13.5 billion till 2015, this divestment signals a new investment philosophy on the LP front.

I believe LPs such as APG and PGGM want to remove the FoF intermediary in future and invest directly or through co-investments. On the other hand GPs such as Carlyle who are integrating backwards through such acquisitions want to have access to bigger cash pools. However to me GP and LP owned by same management would create conflicts of interest and investors would surely like to have these two entities different.

Let’s see how things go around for Carlyle while managing AlpInvest? Time will tell us if they will be able to maintain the trust and commitments from AlpInvest investors?


PE issues today and their implications

Some of the issues the PE world is facing these days and their implications I feel are:

Funds are sitting on a dry powder of around USD 500 bn which is awaiting investments. The investment period deadline of many funds is around 2011-12, so they are left with very less time to invest the uncalled commitments. This is resulting in many funds investing at very high valuations in places like Asia and overheating the already heated market.

Not many IPOs of PE backed companies are happening as a result of this most of the exits are happening through secondary sales. Is this leading to somewhat round robin, where only secondary exits are happening? In that case wouldn’t it be better to have more secondary funds?

In case of buyouts much of the debts used during the 2007 buying spree would be due in 2012-13 and the economic situation of all the funds is not so well that they would be able to payback all the debts. Would this lead to a new market of debt refinancing? If some big repayments do not work out would it lead to new economic problems?

Globally government regulations for alternative asset class especially PE/VC is tightening.PE/VC would no more be as profitable as it used to be. It would no more be a totally unregulated asset class.

Big PE firms have started looking at small deals also.With the big firms trying to take away the pie of small firms who used to specialize in small and medium enterprises, there would be huge competition among the funds. This may inculcate a very favorable environment for entrepreneurs.

India Shining, but what about quality and efficiencies?

After being in Japan for around 6 months, I recently visited India for a couple of weeks. During this entire visit, one question continuously banged my head – India is growing, lots of money is pouring in, much is being spent on infrastructure development and people empowerment, but is it being spent efficiently? The answer to me was no, we are still far behind in using the money to its best optimum level. We are not able to achieve the service/quality levels that should be achieved after spending funds to this extent. In this write-up I have touched some of such issues based on my observations.

I was travelling on Air-India from Narita to Delhi; this was my first time to travel on Air-India. I was expecting the aircraft to be shabby but to my surprise the Boeing was very nicely maintained. Now what was unpleasant was the service offered, if an Indian (I) was uncomfortable with the service, foreigners would surely be uncomfortable. First of all most of flight attendants were well above the age of 40, no disrespect to them but internationally the trend is to have young, energetic, charming flight attendants; since flight attendant is a very highly sought after job getting fresh faces into the staff wouldn’t be a big issue. Next the service they offered was not at all chivalrous, the way they served food, the way they attended calls was inclined toward impolite. There were also some funny incidents like before the flight took off, a flight attendant opened to air freshener bottles and with two hands up in the air moved in both the pathways saying excuse excuse, this was something like taking incense sticks across the plane. Later while taking a transit from international to domestic airport, an AC bus (in poor condition) with a seating capacity of 50, was carrying a single passenger (me); leave green energy but what about the business efficiencies too?  These were just some of the incidents, but they are enough to suggest that my dear Indians we need to wake up, get out of our comfort zone and provide world-class services and quality to become world leaders. This reminds me of a recent Indian film which said “Kabil bano, Kamiyabi apke kadam chumegi” which means become competent enough, success would kiss your feet.

Let’s have a look at the rapid infrastructure growth in India; the recent budget allocated large funds for infrastructure development but what about the quality. In front of my house, construction of footpaths was going on, but not on a single day did I see any laborer doing the job of watering the cement work. The result is what we see everywhere in India, the tiles come out of the concrete or concrete develops cracks. I understand that keeping a check on corruption, bureaucracy is very difficult in such a large country but can’t we have some kind of inbuilt mechanism wherein the mistake cannot happen, Japanese call it pokayoke. Have requirements where in cement which does not require watering is used. In India I have never seen a scheduled bridge being completed on the target date, why not? Why can’t we achieve the dates? The tar roads that are most popular in India, why do they need to be redone again and again? We have some old roads, which are still rock solid but new roads require frequent maintenance, is this related to more earnings for contractors in maintenance work? Money is being spent on infrastructure at the rate of good quality work, but in spite of the quality mechanism being in place the end product is not expected quality. We all know why this is happening? We all, the bureaucrats and the government should now understand that if we want to reach the world no 1 position, quality matters; after all the money spent on the growth of country is money contributed by every Indian through various taxes and fees.

Next I would like to touch the issue of privatization; in India we have seen the great improvement in service quality at airports since they are being run by private companies. How about applying this mechanism to government properties such as rest houses too? Most of the rest houses are located at prime location or scenic tourist places, but they are maintained very poorly and even the service staff have a typical government mindset, wherein they are least bothered about the guests unless the guest is a VIP or above. Give these rest houses to private companies to run, before complete rollover, try pilot projects and based on the results decide the strategies.

I understand that all of the above measures cannot be taken overnight and they are not much in line with Indian mentality, but I believe that change is the only permanent thing in life. If we do not change right now, we would miss the train to the top slot, we would grow over the short run, FIIs would pump in money as long as they find the India story interesting and one fine day stop pumping further money. Wouldn’t it be better that we become not only the best investment centre but also the best service/product/resources provider? We have already provided these levels of services through institutions such as ISRO, where the world recognizes India as a super power in Satellite launching.

Globalization: Japan-India PE perspective (continued)

In the last post I touched the issue of 4 ways of looking at the PE/VC relations between Japan and India. In this post, I would try to elaborate on these 4 ways about how the Japanese PE/VC firms could look to seek a pie of the India story cake.

  1. Invest in Indian Companies – After talking to various PE/VC firms in Japan I noticed that they have very less exposure to the Indian markets. They almost have no Indian company in their portfolio. We need to understand that to capitalize on the emerging economies; companies need to understand the local markets and who can know these markets better than the local Indian companies? I completely agree that to have companies from other country on the portfolio, someone from the investment firm needs to understand the target country’s culture and people. But that should not be an issue for Japan, since many Indian business professionals work in Japan and they are bilingual too. Off-course in the beginning aligning to some new county’s customs and business would be a problem for the investment firm, but that’s fair enough given the better IRRs.
  2. Streamline the Indian companies – Now once the Indian companies are in the portfolio, the Japanese GPs can streamline their operations while restructuring the company. The GPs can then use the knowledge of their world-class quality tools such as TQM, JIT to improve the efficiencies and take the company to new avenues. They can also restructure the company to serve the Japanese markets, like Daiso’s main suppliers are from China and Indonesia, similarly companies in India can also have products catering to Japanese markets, become suppliers to companies such as Uniqlo.
  3. Bring LPs from India on board – As I said in the last post due to not up-to mark performance of the Japanese GPs, some LPs here might have turned a bit unwilling to invest. The unwillingness is but natural because the LPs would always be expecting for much above market returns, which may be high expectation over the short run. However with the recent boom in India, there would be cash-rich LPs in India, looking for fundamentally strong companies in Japan, to invest in. In India basically most of the PE firms, are arms of business conglomerates, Birla, Fortune, Premji and now even Infosys to name a few. These firms would be willing to invest in companies having businesses allied to their business, such as Fortune could invest in a brilliant technology catering to the Retail markets, Premji Capital could invest in some brilliant embedded technology company.
  4. Take the Portfolio company’s products to India – Japan, a technology power has immense potential in terms of technological innovations, the need of the day is to synchronize the applications of these innovations to the needs of emerging economies, and if the GPs can achieve this during the restructuring of portfolio companies, planned to cater to India markets it would be very fruitful. Let’s take an example of this aspect; India has set a target of generating additional 78,500 MW of electricity by 2012, of which Solar and Hydro Power also form a crucial part. India has set an immediate target of 1000 MW of Solar energy by 2013 under the Solar mission and 20,000 MW by 2022. Some days back I was reading in Nikkei Weekly that due to high costs Japan has lost market of photovoltaic cells to Korea and Taiwan, but these days there is some movement for regaining the lost place. If PE firms having such companies in portfolio can have an offering for Indian markets, it would be a right offering at right time. But not to forget, in India cost and durability play a vital role, so due care should be taken of these aspects. Some days back I was looking at a hydropower Japanese product, it is a box, which just needs to be placed in a stream of water, may be river, city sewage drains, industrial drains and it would in turn generate power. Now if this product can be adaptable to Indian needs it would be interesting. Suppose it can generate enough electricity to pump water for a river side farm, than farmers would readily use it, even the government could pitch in with subsidies, because it’s addressing the immediate need of power shortage in India.

Globalization : Japan-India PE perspective

We understand that Globalization means sourcing resources from places, where we get them in the right amount, at the right rate and in the right quantity; this in turn results in efficiencies.

Now let’s analyze India-Japan Private Equity-Venture Capital (PE/VC) viewpoint using this principle. A General Partner invests time, capital, talent and energy in the enterprise and optimizes its performance, if required restructures it. The result is a better enterprise with improved revenues, efficiencies, bottom lines and off course better valuations. Post this they sell their stake in the enterprise through various exit strategies; IPO, sale in secondary markets and sale to a strategic investor to name some. In today’s globalized world the PE transactions need not be limited by boundaries and in many cases it’s happening so, however if we look at the Japan-India PE activities we do not see much happening on this front.

Japan has always been a technology power and being a developed nation and high per capita income has the capital to invest, however due to shrinking domestic markets does not have much promising investment opportunities, if the invested enterprises aim only local consumption. Also the Limited Partners from Japan these days are turning a bit reluctant. India on the other hand has an increasing customer base, incomes, investment opportunities, HNIs, Institutional Investors and companies looking for advanced technologies.

If these two nations can bring about a proper synchronization between all these resources and needs of them, it would be a win-win situation for both the nations. Not to forget India and Japan share a lot common in their cultures and this can help them in doing businesses successfully. However today if we see the portfolio of any big PE/VC firm in Japan or India they have negligible cross investments.

This disparity could be looked in four ways; I would discuss more about it in my next writing.

Rethinking Globalization and Employment

The World Economic Forum works towards building a world-class corporate governance system through its motto “entrepreneurship in the global public interest”. The forum believes that social development and economic progress go hand in hand in hand and hence depend on each other.

The Annual Meeting 2010 of the World Economic Forum just ended in Davos, Switzerland; this meeting had special importance given the gloom in the global economy. While everyone agreed that the effort for a better future has to be a collaborative effort, let’s understand the key issues discussed at this meeting.


Globalization originally meant corporations going abroad and helping the local economies their grow through value addition provided, but the price wars that resulted from globalization basically resulted in lessening share of local companies and sometimes these companies even got wiped off. This eventually resulted in change in the employment scenario there. In the globalization race only present mattered, future did not matter and the value system was skewed. We need to understand that Globalization is meant to bring a conducive growth of global societies; in the financial crisis we realized that while globalizing, enterprises exploited the imbalance between various economies, which may not be a good idea considering the social responsibility that all corporations owe.

Another aspect to this, today the emerging economies which were export oriented are trying to concentrate on their local consumption whereas the developed nations are trying to slower their consumption to beat the recession, but if this goes on for long it would be no good for the global economies. To take one step further, post crisis if the developed world takes a protectionist outlook for say movement of services from developing nations to them, than the developing nations would easily take a counter action for movement of products to them. We should understand that post-crisis power blocks would be different; the developing nations can easily leverage their power with the vast customer base on their side. However with a multi-polar existence of powers, uncertainties and volatilities would also increase.

With this in mind the Leaders of today should act as trustees of long term prosperity of societies and not just by short term benefits, they should be able to enable co-ordination between economies. We need a new global economic model – the rules of 21st century need to be different. These rules need to be simple and both the governments and private sector should understand that they together can contribute better for the wellbeing of the society rather than going alone. New relations need to be established between these entities, Public-Private partnership is the way to go ahead. Josef Ackermann, CEO Deutsche Bank put forth an excellent proposal to create a B20 forum, where business representatives from member nations come together and collaborate for the betterment of global economies. Last but not the least, come what may immediate Action is required, actions matter more than ever today.


Mr Larry Summers, key economic advisor to Mr Obama commented on the current economic state of US as Statistical recovery and a Human Recession. We should truly understand that employment is going to be one of the key issues in this crisis, so creating jobs is going to be the foremost task for the government’s world over.

One of the views on this is, encourage Entrepreneurship; Ventures are essential for growth, encourage entrepreneurs to take risks, they in turn would recruit people and fuel the growth. We cannot play very safe in the financial markets because it would bring in its own tradeoff such as credit becoming costly and in turn spending going down.

Mr Azim Premji, chairman Wipro Technologies rightly suggested that, we should not rely only on large industries for creation of employment, small scale and medium scale industries are also competent enough to create them.  He put forth a rationale, that in places like India, youngsters, who drop out of school after 10th Grade schooling are not skilled enough to fit in highly skilled jobs and are highly skilled for jobs such as agriculture, so the issue of harnessing the talent of this population should also be looked after.  The idea of introducing course-work in basic trade such as auto mechanics, computer repair etc in high schools to enable these students to make them self-employed, can off course contribute to the alleviation of this issue. Adding to this point I think in places such as India we really also need to create a shift in mentality to make people understand that no job is small and that every job is at par.

I understood Patricia Woertz’s, CEO of Archer Daniels Midland point of the importance of agriculture and the suggested reforms that should take place to fuel growth in Agriculture and in turn employment. However with more people moving out of Agriculture as an employment source, I doubt how much we can contribute to the employment issue at this moment by concentrating on this aspect. Ronald Williams, Chairman Aetna Inc talked about the importance of healthcare sector in a better tomorrow and employment as well; I agree with him on the issue of better tomorrow but every dollar spent in a non R&D business will create more employment than a R&D business, at this critical juncture we need more jobs.

Peter Sands, Chief Executive of Standard Chartered rightly pointed that there was no “one big idea, one silver bullet” that would guarantee recovery. To me what was important that, during this 5 day meeting everyone understood that the societies had lost trust, institutions made mistakes and the issues need to be tackled both technically and morally for a better future, short as well as long term.

Implications of the Volcker Rule

Recently the US president proposed a rule “Banks no longer would be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers.”

Mr Obama said that “While the financial system is far stronger today than it was one year ago, it’s still operating under the same rules that led to its near collapse”, the new rule named after former Federal Reserve Chairman Paul Volcker (a staunch advocate of prohibiting banks from engaging in proprietary trading solely for their own profit) would prohibit banks from owning or making investments in private-equity and hedge funds that “are unrelated to serving customers.” While financial institutions could still manage the assets on behalf of clients, they wouldn’t be able to invest in their own funds or those run by Private equity firms.

Since the proposal of this rule major banks have seen a fall in their stock prices by around 4% , if this rule is passed by the Congress the possible effects could be:

Private Equity Space:

  1. The industry would see many mergers and acquisitions with banks being forced to sell their private-equity units
  2. New players would be seen in the Private Equity market with the cash rich banks no more being there and a huge market share was occupied by them.
  3. Existing Private Equity firms would grow stronger
  4. Since huge loans were provided for LBOs by banks, this source of loans for LBOs may be interrupted resulting in a bit trouble for LBOs
  5. In a world where already the sources of capital for Private Equity are less, one source of capital would be removed

 Investment Banks:

  1. All major I-Banks may have to sell some private-equity businesses and stop investing in buyouts
  2. Plan to curb proprietary trading will cost all major I-Banks a huge fall in revenue next year. Goldman Sachs alone is estimated to have a $4.67 billion drop in earnings in 2011

Expert’s have various views about this rule:

David Viniar, Goldman’s chief financial officer, while calling the proposal “impractical” said that“You have global institutions around the world who are set up in a certain way and to put rules in place that roll back the financial system by 10 years I think is going to be a very, very hard thing to do”.

Steven Kaplan, a professor at the University Of Chicago Booth School Of Business said “Targeting private-equity investments by banks doesn’t go to the root of the problems that caused the financial meltdown”, “Private-equity investments did not cause the crisis,” Kaplan said. “It was their loans that went bad.”

However from the US Government side Austan Goolsbee, a member of Obama’s Council of Economic Advisers, said that the proposal was “not intended to get rid of asset management as a function.”