Do VCs really add value?

     Print Edition: Nov 14, 2010

Then: 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 have used VCs in the headline to loosely describe all long-term equity investors in this industry) do not 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. "Most do not and cannot add value."

Dalmia is being harsh. How much value a VC 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. Take the case of erstwhile BFL Software. Originally promoted by Kolkatabased businessman Keshav Bangur, it was bought out (India's first such deal) by what was then ING Barings in March 1998. The two companies were merged, and Barings 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: "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."

Now: Total private equity investment in India, at $1.3 billion, has surged recently. Sales and profits of listed PE-backed companies, on an average, have grown faster than those of the Sensex and the Nifty stocks.

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