Friday, March 28, 2008


I’ll come straight to the point. I was buying a house; and as the travails go in such cases, I was short of money. Given my ‘excellent’ credit rating within the family, my wife – my only practical hope for cash infusion – refused to even enter into any discussions of lending me money (I think a tube light would have stood a better chance). Gloriously confident that any bank/public institution would easily lend me the required investment, I was ready to walk out, when Dad ‘occurred’! My father questioned me on my intentions to take a loan from the outside public, and offered me his money. Though the offer was deliciously lucrative, my biggest worry was that if I accepted this ‘private equity’, Dad would get to make all the decisions with respect to how the house should be done up; and being typical South Indians, we’ll end up with a wash basin in the drawing room! Clearly a nightmare... I took a day off to decide...

But seriously, away from familial issues, I did start wondering whether private equity fund investment helps or actually destroys the performance of firms? Don’t private equity investors, who end up holding significant share holding within the company, interfere much more in the CEO’s and top management’s decisions than would have external banks or general public investors? Almost a year back, I had written an editorial on why promoter-owned private companies are much better than publicly held companies. But what about private equity from non-promoters? Wouldn’t that end up being a worse bargain?

A 2006 Wharton seminar on Private Equity showed how private equity investment for shareholders seemed to be more efficient than the normal stock markets...and even loans! The seminar summary quoted Warren Buffet’s comment, “Borrowed money is the most common way that smart guys go broke!” While The Economist magazine described private equity firms as the “sharp edge” of contemporary capitalism, Bloomberg’s Venture Economic report shows that over a period of 10 to 20 years, private equity has outperformed the markets by a thumping 66% to even more than 100% in some cases! The National Bureau of Economic Research, in their benchmark paper titled The Cash Flow, Return and Risk Characteristics of Private Equity, resoundingly proved how private equity always generates “excess returns” relative to ordinary equity markets. Very interestingly, Mercer came out with its 2007 private equity study that confirmed, “Not only has the rate of return for PE firms overall been substantially greater than that of public corporations, but such companies – once returned to public ownership – have outperformed the market as a whole.” To this effect, a recent Economist research concluded that “in an odd twist, all the money going to private equity has helped buoy shares of public companies!”

The case for private equity funding has remained strong throughout the world’s top economies. While the US and UK, according to the European Venture Capital Association data, had the “broadest and most developed private equity markets in the world (ranked at number 1 and 2),” such private equity investments had actually led to dramatic innovation and stunning economic growth too! Look at the situation in India. The Economist Intelligence Unit’s 2005-06 worldwide survey rates India second from bottom in terms of promoting environment for private equity. The famed Apax Partners, in 2007, in their yearly survey, Future Trends in Private Equity Investment Worldwide, statistically confirm the same with the cherry statement, “India has the second worst environment for private equity!” The survey, in fact, rates India last in all countries surveyed in the factor of ‘Market Opportunities’ (for Private Equity), an honour India could well do without!

But then, even if the case for private equity investment is thumpingly strong, how does a promoter retain decision making power despite private equity investors (or even public equity) being present? For that, we have the stunning concept of super-voting rights – that is, having more voting rights than your shareholding! For example, Page & Brin hold only 20% of shares of Google, but retain over 60% voting rights. Think about it, Rupert Murdoch’s family owns only 30% of shares in NewsCorp. What’s their voting power in the media behemoth? 100%!!! And now Rupert Murdoch might be trying to even invest in The Times of India group, if our cover story analysis is right, through private equity! Well, my decision was made. I went back to Dad, took his private equity without a hitch. And what about house renovation decisions? That was super-voting simple. My wife now holds 0% ‘shares’ of the house, and retains 100% voting and decision rights! Beat that for quick learning...


Friday, March 14, 2008


I hate dishes made of brinjal... or for that matter bitter gourd... or lady’s finger! But it’s really funny that every second day, when I start for office, I always end up getting either of these brilliant dishes for lunch – and subsequently for dinner too. This is despite the fact that I most patiently “advice” our intemperate ‘trade union’ cook, who’s been with us for years, about what food I prefer! So when recently my patience gave way, I decided to inform Mr. Cook once and for all that I was a kid no more and that he should realise he’s preparing food for the group editor of a leading magazine house! “You’re no celebrity that I should cook special meals,” he replied disdainfully without sparing me a glance, “and even if you were, do I get paid more?”

...Ouch!!! Though I slinked away at that moment, the question was pertinent. Does an association with celebrities really add to a company’s worth? Would an association with, say, the world’s best golfer Tiger Woods (associated with TAG Heuer, Accenture, Nike, American Express, Gatorade, GM...) increase shareholders’ value of the respective firms? Would Shahrukh ‘endorsing’ movies to products to – as we mention in our flap cover story – IPL increase their reach? “Definitely not,” said a marketing ‘expert’ I met at one of the conferences recently. “It’s not the celebrity, but the product’s realistic worth and value that ensure a company’s profitability!” My research team finally got my intellectual ship sailing; and here was what they gave me!

Professors Robert Clark (HEC Montreal) and Ignatius Hortsmann (University of Toronto), in their academic paper titled Celebrity Endorsements provided experimental evidence that definitely “celebrities enhance product recall... They enhance consumer perception of product value... Consumers value more highly a product endorsed by a celebrity than one without a celebrity endorsement.” Another world-class and path breaking statistical paper from the Marketing Science Institute by Amit Joshi and Dominique Hanssens (Advertising Spending and Marketing Capitalization), after analysing data collected over a decade for five PC manufacturers – Apple, Compaq, Dell, HP, and IBM – proved quantitatively and conclusively that when celebrities endorsed brands by appearing in its advertising or even by visiting retail locations and special events, shareholders and prospective investors immediately ensured the firm’s future earnings potential appreciated. Even ‘fast food’ brands like McDonald’s had their “market-adjusted values” increase phenomenally simply because of endorsements from celebrities like Michael Jordan! After analysing 110 high-profile celebrity endorsements, Professors Kamakura (University of Pittsburg) and Agrawal (California State University) concluded in their paper (The Economic Worth of Celebrity Endorsers) that while a growing number of firms are investing in celebrity endorsements to enhance the value of advertising dollars and build brand equity, the average impact of these announcements on stock returns is definitively positive. In summary, that celebrity endorsement contracts are viewed as “worthwhile investments in advertising.” Proving the same were Miciak & Stanlin who, through their benchmark work, showed that having a celebrity on board positively affects stock returns. They quote, “Celebrity endorsements work so well that (now, globally) about 20% of all TV commercials feature a celebrity.”

The writing on the CEO manual is clear: If you had money to invest and had a choice between giving the best of the best quality to the consumer, versus providing normally good quality that is endorsed by a celebrity – categorically go for the latter! Most coincidentally, last fortnight, while I was on a sponsored tour of India’s costliest and most sought after tourist train, the Palace on Wheels, many American and European tourists on the train told me (wide-eyed) that I decidedly resemble, hold your breath, Tiger Woods! After initial disbelief, and after repeated confirmations, I became almost blindingly confident that perhaps I do look like the Tiger! Not wasting a minute when I returned home after the trip, I caught hold of my supercilious swaggering cook and this time ranted off remorselessly about the fact that people now even considered me a celebrity, Tiger Woods! For the first time, I saw semblance of a little respect in his eyes. Not that it mattered, but I knew I had hit it where it mattered the most! I now could at least demand a trite better meal than what I was getting. And better it did get! The next day, instead of just one dish that I generally used to get, I got three – brinjal, bitter gourd and lady’s finger!!! I finally got the equation right – When Tiger Woods wants food, he orders from outside!