Private Equity doesn’t like Transparency

Luis Miranda
Updated: Aug 13, 2012 01:12:13 PM UTC

Luis Miranda connects dots. He started investing in India's infrastructure a long, long time ago. 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, L&T Infrastructure, Delhi International Airport, Gujarat Pipavav Port, Gujarat State Petronet, and Manipal Global Education. Luis today spends most of his time, together with his wife, on non-profits. He is Chairman of CORO and Centre for Civil Society and Managing Trustee for Collective Good Foundation. Other organisations include Take Charge, 17000 Ft Foundation, SNEHA, Sunbird Trust, Operation ASHA and Educate Girls. Luis graduated with an MBA from Chicago Booth and is a Chartered Accountant.

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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