Moneymakers on the move

Demand for private equity talent in India is higher than ever before. For fund managers and their limited partners, this is proving a headache, reports Siddharth Poddar.

Until last month, Bala Deshpande was a senior director of investments at ICICI Venture, India's largest private equity firm.

Then she quit her job, reportedly to join New Enterprise Associates, a US based firm. Months earlier, Aluri Rao, another senior director at ICICI Venture, had left the firm to head Morgan Stanley Private Equity's India operations.

ICICI is not the only general partner to see key professionals depart. Dinesh Vaswani, a managing director withTemasek Holdings in India, recently left the Singapore sovereign fund to co-head the fledgling India operations of Engle-field Capital, a London-based investor. A total of 15 professionals gave notice at various private equity employers such as Actis, ICICI Venture and Sequioa Capital to join the recently created private equity business of Reliance Capital.

These are just a few examples of private equity professionals in India switching jobs in the last few months. Though the degree of mobility of professionals across various private equity markets is not something that can be determined statistically, it does seem as though buyout and growth capital experts in India are more willing to switch jobs than their colleagues elsewhere.

This is hardly surprising. India is, after all, an emerging market for private equity. New players – both domestic as well as international – continue to establish operations in the country, a trend that is showing few signs of abating. According to a report published by Adveq Management, a Swiss fund of funds, the total number of fund managers with a significant focus on India has increased from 35 in 1997 to 190 in 2007. In conversations with local market participants, numbers as high as 300-400 active partnerships are being thrown about.

As befits a country where private equity as a country is still young, there has traditionally been a shortage of experienced operators. But the gap between demand and supply has only been widened by the rapid proliferation of funds. “The growth of the private equity business has by far outstripped the growth of human capital,” says Lachmi-Niwas Sadani, a director of AXA Private Equity, a global fund of funds manager that has committed about $200 million to Indian funds.

Sadani believes that some funds have themselves to blame for the loss of key staff: “A few Indian firms have lost people because they just don't compensate very well. Even their carry programmes are not as generous as they could potentially be. Once that happens, only two kinds of people remain – those right at the top who are compensated very well, and the mediocre talent, which is not in demand elsewhere.”

Issues pertaining to compensation are the most frequently mentioned by both GPs and LPs alike when asked to comment on India's rapidly spinning employment carousel. Echoing Sadani's point, Wen Tan, an investment director at Squadron Capital, a Hong Kong based fund of funds manager, says: “One of the classic reasons for mobility is a share of the economics, typically with captive funds where the parent company takes a large share of carry. In India, historically, a large proportion of GPs have been captive.”

Tan points to a contrast in behaviour between international captives, where the carry taken by the parent company has decreased significantly over time, and Indian groups, where the adjustment has not happened to the same extent yet. “It is something that sponsors need to take care of,” he insists.

Sponsored funds have recognised the need to increase compensation and carry, says Nitin Deshmukh, who runs Kotak Investment Advisors, the private equity platform of Kotak Mahindra Bank in Mumbai. He insists that while many institution-sponsored funds had issues with carried interest in the past, that has changed. “All have realised that carried interest is an absolutely essential element in private equity fund management to retain talent,” he says.

In any case, Deshmukh believes that there are only a handful of experienced professionals in the country that have actually experienced the benefits or value of carried interest yet – another reason why many professionals have been willing to change jobs. “Once big gains happen and carried interest hits the bank accounts we will see more stability,” he says.

Ajay Relan, who pioneered CVCI's India business in the mid-1990s and recently quit the firm to set up CX Partners, also argues that people with just a deal or two under their belts don't give up much when moving to another firm. Besides, “if you've invested at the height of the boom, and now some transactions are under the water, what do you have to lose when you move out?”

The key to retention, once again, is to tie key personnel into the firm by sharing the spoils appropriately. Relan says that he doesn't see turnover in the team being built at CX Partners. “If you're willing to spread the wealth and make people true partners in the business, then it won't happen.”

Shahzaad Dalal, vice chairman and managing director of IL&FS Investment Managers, acknowledges that his firm, too, has lost a number of professionals to other private equity firms in the past. He says that because IL&FS has a large team of 36 investment professionals, the compensation the firm pays is less than that paid by international players who have only one or two members in India.

“We became a poaching ground, as we have trained manpower in the institution. In the last one or two years, we have restructured our compensation and increased our carry sharing to the team to 70 percent. This has had a very positive impact, especially on senior personnel, and it has considerably reduced attrition,” he adds.

Of course money isn't the only thing that motivates aspirational investment managers. Some will take up a new role in order to escape a particularly hierarchical structure, or to achieve greater personal independence. Says Tan: “People want to take decision-making upon themselves and don't always like having things passed through investment committees first, especially if these are out in the US or Europe.”

Tan speaks about the need for firms to address why members of their team are leaving, and also the need for firms to institutionalise to an extent where departures do not bring operations to a standstill. “They need to minimise departures and they need to minimise the impact of departures,” he says.

ICICI Venture, which has probably lost more people than any other firmin India, is a case in point. Despite having lost a number of professionals over the years, the firm has managed to grow into one of India's largest private fund managers and has diversified its strategy to include real estate and mezzanine funds as well.

Frequent mobility is also a concern for limited partners. Says one: “Ours is a people business. We invest in teams. Clearly, from that standpoint, mobility is not something we're fond of as the value proposition is not there.”

In the long term, however, the industry on the whole stands to benefit from professional mobility. Experienced dealmakers leaving established teams to set up their own firms will ultimately increase the pool of investable funds.

While efforts are being made to retain talent, it is doubtful that mobility will disappear entirely once India's private equity market matures. Because even in more mature markets, turnover is a fact of private equity life. “It comes down to compensation and independence in decision-making,” as Tan puts it.

In other words, greener pastures will continue to lure ambitious professionals away from the firms they currently work for. Smart compensation structures will increase stability at partnership level. What they won't and shouldn't do is eliminate mobility once and for all.