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| Adding value: Baring's Bhasin (bottom)
not just merged his buyout BFL with Rao's Mphasis but also
helped reinvent the new entity's business model |
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Sometime back, a Delhi-based private
equity investor described his business to this magazine as "legalised
banditry". No doubt he was exaggerating for effect, but the
point he was trying to drive home is by and large valid. And which
is that, often, private equity investors (we've used VCs in the
headline to loosely describe all long-term equity investors in this
industry) don't put in enough effort to justify the kind of returns
they end up making on their better deals. "VCs may pretend
to add more value than they actually do," says Gaurav Dalmia,
a Delhi-based investor himself. "They know the language, intimidate
management and get away with murder. Most don't and can't add value,
honest ones say so."
Dalmia is being harsh. How much value a VC (we'll be using this
word in a broad fashion in the rest of the story) adds depends
on a number of factors such as the nature of the fund, the stage
of investment, nature of the business, the quality of management,
and the management's own inclination. A buyout fund will necessarily
add more value because it is taking control of a company and how
well its investment fares is dependent on significant increase
in the value of the business. Therefore, a buyout fund may want
to change a non-performing management, sell poor quality assets,
restructure the business, or even merge it with a similar company
in its portfolio.
Take the case of erstwhile BFL Software. Originally promoted
by Kolkata-based businessman Keshav Bangur, it was bought out
(India's first such deal) by what was then ING Barings in March
1998. While the Bangalore-based company had reasonably good capabilities,
its marketing skills were non-existent (at that point, its revenues
were stagnant). So, in 2000, Baring India decided to merge the
company with Jerry Rao-promoted Mphasis, which had positioned
itself as an e-business integrator along the lines of Scient,
Viant and Sapient. However, Mphasis had poor delivery and fulfilment
capabilities, although it had a global management and superior
marketing capabilities. The two companies were merged, and Baring
went on to create Mphasis BFL, which by March next year will have
revenues of Rs 1,000 crore. It is already valued at more than
Rs 2,100 crore. Says Rahul Bhasin, Baring Private Equity Partner
India's Managing Partner, and who until recently was the Chairman
of Mphasis: "I would like to believe that we have brought
significant value to Mphasis BFL in a variety of areas, ranging
from governance to changing management at different stages of
the company's growth to the business model itself."
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| Right choice: By backing a professional
like Spectramind's Raman Roy (top) ChrysCapital's Ashish Dhawan
may have helped stoke the BPO boom |
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In the case of start-ups, the potential and the need to add value
is greater. Take the case of Applabs, a Hyderabad-based software
testing company, where WestBridge Capital Partners was the early
investor. When Applabs wanted to broaden its US footprint, WestBridge
actually stepped in to find a suitable target, which it did in
the form of a small Utah-based company that was part of its network.
Sometimes a VC can help turn a dead-end business model on its
head and, thus, rescue it. Like it happened in the case of Manish
Sabharwal's India Life. When first conceived of by the Wharton
grad in 1997, it was supposed to be a life insurance and pension
fund management company. But after wasting two-and-a-half years
trying to get started, India Life made a U-turn and decided to
become a focussed BPO in HR. Says Sabharwal, who quit India Life
after it was acquired by Hewitt, and is now the Chairman of TeamLease
Services, a temp staffing company: "There's no doubt that
ViewGroup (which invested about $3 million or Rs 13.2 crore in
India Life) played a key role in mutating the business model.
Often, entrepreneurs don't realise that not every idea is an opportunity."
Such opportunities reduce dramatically when the VC invests in
large companies, especially if they are already listed. Says Akhil
Gupta, Joint Managing Director, Bharti Tele-Ventures: "In
a company like Bharti, they (Warburg Pincus) don't get involved
in day-to-day running of operations. But as global investors,
they bring tremendous value at the board level." Agrees Ratul
Puri, Executive Director, Moser Baer, which was initially funded
by IFC, but now has a director on the board from Warburg: "They
make excellent board members because of their broad perspective
and commitment to make their investment succeed."
That's one reason why companies that could just as easily raise
money from the capital markets go for private equity. This is
especially true in the case of companies that may be fundamentally
strong, but suffer from poor perception because they aren't savvy
enough to create a buzz about themselves. Take for instance, Abhishek
Industries, a large terry-towel manufacturer that also supplies
to Wal-Mart. CVC International (of Citigroup) invested $10 million
(Rs 44 crore) in Abhishek Industries earlier this year, and Citi's
stamp of approval immediately boosted the stock some 9 per cent.
| Often, private equity investors don't put
in enough effort to justify the kind of returns they end up
making on their investments |
However, there's danger of such deals (not necessarily this one)
turning out to be what a Delhi-based VC calls "the Ganga
jal syndrome"-that is sprinkling the holy water of VC money
on a company to "purify" its image. The stock goes up
for no other reason-the management is happy and so is the VC.
But retail investors, especially those that are not savvy, may
not have a similar experience. Such instances may increase if
the investor is actually some sort of a hedge fund in the garb
of a private equity investor. But on the whole, there's little
doubt that it is the VCs who help turn the dreams of entrepreneurs
into reality and thus grow the economy.
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