5 lessons Private Equity funds have learnt in India

After losing money in dud investments made between 2005 to 2008, PE funds have tightened procedures before taking a investment call

Some of the world’s marquee private equity (PE) firms have lost their investments in India, mainly due to governance issues in their investee companies. Many of the dud investments were made between 2005 and 2008 and in most cases, the PE investors did not even get adequate post-investment rights. The matters were further compounded by poor reporting to PE funds as well as investees firms’ lackadaisical attitude towards investing in systems, procedures and controls. What are the lessons that PEs have learnt while investing in India? Experts list out a few:

Know your company

Before investing, make sure performance meets projections. The promoter might project good results and share price might also shoot up in euphoria before the PE investments, but there is no guarantee that the valuations will remain the same. Many PEs – much to their dismay – have found that share price fell by almost 50 per cent within a year of their investments. Apollo Global’s erosion of investment in Welspun shows why knowing your company is very important before making the investment. “The change in the approach of the PE guys is evident in the way they look at deals - extensive background checks on the company and the key managerial personnel are normal procedures now, and many times this gets done prior to the term sheet stage itself - apart from this they do insist on regular report backs, agree formats for those and in many cases insist on well defined internal audit and controls review on a regular basis,” said Sanjeev Krishan, leader Private Equity, PwC India.

Cross-check due diligence reports

For Bain Capital’s dud investment in Lilliput Kidswear, EY had made a valuation report for the PE fund. Bain has now sued EY in a US court claiming the financial reports of Lilliput Kidswear were also prepared by EY and that they were fudged. By the time Bain invested and later lost $60 million in Lilliput and got hold of financial reports, it was too late for the fund. Experts say it’s not only important to get due-diligence done by an independent firm but it needs to be cross-checked, too.

Read quarterly performance properly

Although the funds take deep interest in the day-to-day running of the companies, quarterly reports give a glimpse of the firm’s performance. If the results are not up to the mark or auditors are showing the red flag, then it’s time for action.

Exit when things go bad

Many funds fail to get out of the investments even when things are looking bad in a company. It took Blackstone seven years to get out of textile exporter Gokaldas Exports at a bigger loss. Experts say exiting at the right time is key as waiting for things to turn around could often mean higher loss in future.

Admit your mistake

Very few PE funds admit they have made a mistake. They complain to market regulator Securities and Exchange Board of India against the promoters of the companies they have invested in, but keep backing their investee company in public. Morgan Stanley, Norwest Venture Partners, General Atlantic LLC, Goldman Sachs and Everstone Capital have still not admitted that their $425-million investment in Asian Genco was a wrong call.