The market for “nice” investment bankers..

At a social gathering last week I was asked the usual “so, what do you do?” question by somebody I had just been introduced to. When I replied that I was an investment banker, I got an incredulous look followed by “But you look too cherubic to be an investment banker. You should have a sharp angular face and look mean. I suggest you change your profession, you just don’t look the part”. While this sounds like an amusing anecdote, I was left wondering whether this was a reflection on the profession or on me.

I recently read an article in ToI about an amusement arcade game called ‘Whack the Banker’ which was proving to be a big hit in the UK. The media of course, with predictable regularity profiles the greed and avarice of alpha male bulge bracket investment bankers who snatch food from the mouths of starving, homeless people to pad their own pockets. These are of course facetious extremes; reality probability lies somewhere in between.

In our own interactions with investment bankers, especially those in the mid market segment, we’ve generally seen a fairly well ingrained sense of ethics and fair play. Of course, we’ve had the odd case where a banker deliberately misrepresented facts about their client or tried to go behind our backs and poach our client. This said, the one aspect of i-banker behaviour we’d definitely like to change is the unnecessary posturing and game-playing that is almost de rigueur for every banker driven deal. I strongly believe that there is absolutely no gain in value that is derived from such posturing and it adds 20-30% to the time a deal takes to close. An honest dialogue between the bankers representing both sides of a deal will probably achieve better results for both parties and save a lot of time for all concerned.

At Viedea, we’ve always believed in the value of being honest, straight-forward responsive bankers who work with like minded clients. In fact, that is our USP in many ways, along with the emphasis on quality – quality clients, quality deals, quality employees and quality work. There is a market for “nice” investment bankers after all!

Education : The new holy grail for VC/PE's

Ask any VC in India these days what their top investment sectors are and more often than not you will hear ‘education’ and ‘healthcare’. ‘Recession proof’, ‘underdeveloped’ and ‘large addressable market’ are phrases that almost certainly ensue.

Let’s focus on education to try and understand where the real opportunity lies. India’s young population and the average Indian households’ propensity to spend heavily on education have been well documented. So are the systemic shortcomings and inefficiencies. The size of the education sector may not come as a surprise; considering each one of us has either spent or continues to spend on education. We estimate the Indian education sector’s market size at $50 bn annually. Except for some sub-segments, theoretically the sector is indeed recession proof. The sector continues to be heavily regulated, especially schooling and higher education; however, private firms have been extremely adept at circumventing antiquated regulations to create opportunities for themselves.

VC/PE investors naturally recognize the potential returns investing in this sector can offer. Based on proprietary research by our education sector team, we present a ‘below the hood’ peek into the sub-sectors that form the education pie-

1. School/College Management – If fund managers had their way, they would probably want to run a chain of schools (K12- Kindergarten to class 12) or colleges, with what ever focus (premium vs mid/low income) they deem fit. However, owing to regulatory & to some extent social obligations, schools and colleges in India have to be managed by a not-for profit entity (trust), thereby forcing ‘for profit’ enterprises to largely stay away from the ‘business’ of schools.

Recently we have seen investments by funds in pre-school chains and several private companies engaged in allied businesses taking ownership of school management. Some companies have worked their way around by differentiating the school ownership entity (trust) & school management entity which profits from land lease rentals, supply of IP, hardware, etc. However, we do not believe that school/college management is an attractive investment proposition for funds under the present regulatory conditions.

2. Information and Communication Technology (ICT) for Educational institutions:The ICT opportunity comprises technology solutions for learning, hardware, infrastructure, multimedia content, institution & student management systems, etc, for K12 and higher education.

The ICT business has matured, with strong competition between the established (mostly funded or listed!) players such as Educomp, Everonn, IL&FS ETS and NIIT. However, the addressable market is extremely large and there is an opportunity for atleast a few other players to occupy and service various niches in the space. Content on a standalone basis, we believe is difficult to sell to schools/students and most of the ICT/technology player’s have setup proprietary content development teams.

While ICT is an obviously large market opportunity, we believe that the key to scaling up is the ability to sell to government. Private schools may fetch higher margins, but the sheer volumes that government sale offers is vital for a private ICT player to scale up. Moreover, higher education, which has no nationwide common syllabus like ICSE/CBSE, is also largely untapped by ICT players and presents a potential opportunity.

3 3. Test prep and Tutorials: Test preparation coaching and tuitions have co-existed with traditional teaching and are an integral part of the Indian education system, especially in urban India. The apparent problem is scalability, especially with tuitions & test prep which tend to be built around individual(s) or at best limited to a particular region. Several test prep institutes such as Career Launcher and TIME have received PE funding. However, we believe that beyond a point scalability will become difficult for brick and mortar only model because of issues such as consistency of coaching, franchisee model pitfalls, real estate costs, etc.

Our hypothesis is that there is an opportunity for a nation wide test prep play through a strong blended model, combining brick and mortar with online delivery. While there is no success story yet to demonstrate this, with a clever combination of easy to use technology and good execution, we will witness a few success stories in this space in the coming years.

Online tuitions for school students we believe, is also catching up and scaling up is relatively easier. The nay-sayers can use statistical data about broadband penetration being low, but the absolute number of students using internet as a source of knowledge has gone up and there are only a limited number of tuition/coaching providers who are catering to them through the blended model.

4 4. Vocational Training: Nasscom and every other survey on the formal education system in India highlights the huge gap between employability and skill levels graduates in India possess across sectors. Be it IT, retail, financial services or BPO, companies spend huge amounts on training to make graduates productive after hiring them. The NIIT’s and Aptech’s have to a certain extent been successful in addressing the needs of the IT industry over the years. However, from English language training to financial analysis skills, the gap is still huge for the vocational training market. Recently, classroom based programs in English language training, BPO, Retail training, etc have been scaling up and have attracted investments as well. However, our hypothesis is that just like in the Tutorial/Test Prep space, a pure brick and mortar model will have scalability issues. A blended model with contact centers and online delivery (either web based on through VSAT networks) is more likely to scale up. Moreover, vocational training firms are now looking to tie up directly with universities and offer courses to students, which is also an interesting model to watch out for. Companies that have a placement services background seem to be in a better position here, including Edserve (recent IPO); nevertheless, the question of ‘recognized’ certifications needs to be addressed.

5 5. E-learning technology and content development: Within the outsourcing space, Indian companies have developed capabilities in development & consequently implementation of E-learning initiatives plus learning management systems (LMS) for corporate clients as well as educational institutions. The development and conversion of content for publishers & educational institutions, especially for the US market is also an opportunity that a few Indian companies like Excelsoft have targeted very successfully. These services are rendered mainly by small to mid size companies, but some of the big software vendors have strengthened these verticals lately. This space continues to be fragmented and smaller players may find it difficult to scale. However, mid sized players have high margins and good expertise and are well positioned to make inroads into markets outside the US. We believe mid sized players in this space present a low risk investment opportunity for PE funds.

The sectors discussed above are not exhaustive; however, a majority of deals one is likely to see in the education space will fall into one of these buckets. As in any investment, the quality of the management team is probably the most critical factor, apart from the market opportunity they are addressing. For more information on education sector opportunities and interesting companies in the space, please contact Aravind G.R (aravind@viedea.com) or Deepak Srinath (deepak@viedea.com).

Retail debacle:

‘Bird of Gold’ with reference to the ‘Soney ki Chidiya’ , a mascot of sorts to the Pantaloon Group and title of the famed report by Mckinsey, perhaps was the defining phrase for the Indian retail story, until now!.

We were always being served by the local kirana shop (there is one such store for every 100 people) and then came the era of organized retailing. The promise of a bird of gold in the hands of the burgeoning middle class seemed so easy to catch, for all those who had deep pockets (capital). However, Subiksha and Vishal have recently announced closure of one third of their stores. Reliance, Tatas & Birla have almost shelved their expansion plans & are about to close many of their existing outlets. The third quarter results of listed retail companies also depict their precarious state of operations.

Declining margins may be attributed by some to increasing costs of debt & real estate (yes, most of the retailers had locked in their rates) but explaining decline in sales is hard. Same Store Sales growth (once you remove sales due to new stores added) reveals that the actual sales have not just slowed down, but declined. The Indian growth story was largely fueled by the increased spending by middle class hypothesis, this decline in sales should come as a serious blow to the ‘strong fundamentals’ theory.

‘Bottom of the Pyramid’ now seems like a mirage, but we believe it is not. The consumption story of India remains, but organized retail is loosing its part in it. The problem, as R Subramanian (MD, Subhiksha) puts it, ‘Indian retail was doing too much, too soon’. Companies poured in billions of rupees into building outlets at a frenzied pace. Reliance had plans of 2,000; Subhiksha actually opened 1,500 outlets in 2 years; Pantaloon opened dozens of new formats (including one which was supposed to sell candles). All of this ‘leveraged’ investment happened at the front end, whereas the modern format of retailing relies heavily on the backend (supply chains); except a few like Pantaloon & Reliance, none of the retailers invested & strengthened their supply chains. Now, Subramanian admits ‘It was no wonder that, for most new entrants, the expansion was a disaster waiting to happen’. These retailers who faced increased costs in goods, salaries and through inefficient supply chains; were pushed to increase the prices, thereby not delivering on their promise of being the cheapest seller. We started going back to our trusted old friend at the street corner shop.

The way out (is there one?) or the way going forward- Those who continue to deliver the promise of being cheap & efficient will continue to thrive on gold. Cutting costs and reworking their system is top priority for the retailers who are hurt. We believe that a sound retailing model should always be backed by support/supply system, without which the advantage of organized retail format is lost.

LPO Prospects in India

If you are wondering whether the current economic slowdown has spared any industry, you will be pleasantly surprised to hear the answer – Yes. Legal Process Outsourcing (LPO) industry seems to be the one which is actually benefiting from the economic crisis! As the corporates and law firms themselves are struggling to trim their cost structure, LPO business is set to benefit from it. One obvious, rather a more meaningful choice for the corporates and law firms abroad is to consider outsourcing some parts of their legal and administrative work to a low cost destination like India where people have no dearth of talent too. However, it is good to understand whether we are fully equipped to reap the benefits from the present opportunity.

LPO as an industry in India is in a nascent stage. The industry is highly fragmented with over 100 firms operating in different verticals. According to a report by ValueNotes, the revenues from legal services offshoring are forecast to grow from $146 million in 2006 to $640 million by the end of 2010. Forrester Research projects that $4 billion in legal work is likely to come to India by 2015. Currently, the size of the industry is small (especially, considering the number of players operating) but the growth prospects are good. It is obvious that many entrepreneurs jumped in to catch a pie of this lucrative industry. But the fact is that only a handful of companies in India are doing well and most of others are still small and suffering. The lack of preparedness while staring the business has led to quality issues as well.

No doubt the industry holds tremendous prospects, but it is critical to understand the industry dynamics which are specific to LPO. Cost benefits are definitely a top consideration for the firms who would like to outsource legal work to India. The cost of getting work done from India could be as low as 20% of what it is in the US. Availability of manpower is not a big constraint in India as thousands of students graduate from Indian law schools and engineering colleges (engineers are needed to execute work related to IP/Patent research). However, training them to carry out the foreign legal work is important and this needs investment. Association with a foreign law firm would be extremely helpful in building the LPO business. This helps in knowledge transfer as well as assurance as far as client base is considered. Signing in a legal client is not a simple task unless there is some backing by a foreign legal firm or you have sales persons who are well connected in the industry.

There is interest from the investor community in the industry. Firms such as Clutch Group, Pangea3, United Lex, Mindcrest and TechLit have been funded by angel investors and VCs.

We believe that LPO is certainly a good space to jump in, but one needs to focus on certain key aspects to be successful:

• Cost benefit is an obvious consideration while outsourcing – every player in the industry offers it. But being quality conscious is extremely important to be successful and to grow the business. The challenge for the Indian LPOs is to convince the firms outsourcing the legal work, about quality of output.
• Investment in training and devising right training techniques is important.
• Industry connection/network is critical – either through foreign law firms’ association or through a well connected sales force
• Confidentiality - this is an important aspect any legal client would expect from LPO firms while executing the assignments. Therefore, implementing measures to take care of this and winning client's confidence is of great importance.

We also believe that as the industry becomes more competitive, small and inefficient players may be forced out of business and we could also witness some consolidation happening in the industry.