Fairval

Notes on Indian equities, sectors and economy

The LP displeasure at AVIGO – what may have caused it?

Posted by fairval on October 25, 2015

Last week several business papers like The Economic Times and Mint reported a rare kind of event – Limited Partners of a PE fund trying to chuck out the fund managers. Such events are certainly ‘extreme’ events.

An article in Mint says that LP displeasure was driven by poor performance. It seems Avigo management team or General Partners returned only 30% of the $125 million in capital raised as part of the Avigo SME II fund in 2005.

Separately, The Economic Times reported that LPs had sued Avigo for negligence and mismanagement of funds. Achal Ghai, the managing partner of the fund has been asked to leave and global investor Siguler Guff headed by Praneet Singh in India is now managing the show

According to ET, the tensions started in the second fund where almost 75 per cent of the fund was invested in Tecpro Group. The fund had invested in Tecpro Systems which got listed post investment, as well as some unlisted group companies. From ET article — “The fund managers did not sell the stake even when the stock rose five fold. Today the value is down by 60 per cent,” said a fourth person involved in the issue. The Tecpro stock had reached a high of Rs 454 per share in 2010, but is currently languishing at Rs 7.19 per share.

The articles in both Mint and ET don’t quite make it clear exactly what was the LP’s core issue. For ex, was it:

  1. So much exposure to one Group? Normally, any investment vehicle sets upper limit to the amount of investment it may make behind a single entity or management. 75% to one group, if true, is probably unheard of. However, the GP’s must have taken clearance from LPs before investing, so the extra ordinary allocation to Tecpro could not have been the main cause of distress.
  2. Or was it failure to sell in the listed company when the price was high? Is this what is meant by ‘mismanagement’ as quoted by ET.
  3. Or is there more to it? What, for instance, was ‘negligence’? Failure to sell does not sound like negligence.

I was checking out Tecpro financial’s sometime in FY12. Around that time, its revenue was around Rs 2500 crore. The company was growing strongly, at around 30% CAGR.

There was one item in its balance sheet which was rather unusual. At that time, its receivables figure was quite high, almost equal to 12 month of sales. If I remember correctly, one reason why this was bloated was that the company was carrying around Rs 800crore plus of ‘retention money’ within receivables.

This needs a bit of explanation. Tecpro was in the EPC business. In this, the customer pays in stages, partly at start, and then at milestones. When you commission the project, the total customer payment will typically be around 90%. Customers tend to retain around 10% for a year – to see of the project is delivering as per specs. This suggests retention money in sundry debtors should be around 1 year of retention ideally.

Rs 800 crore kind of retention money should equate to a revenue delivered of around Rs 8000 crore. But that was equal to almost 5 years of revenue. Or to put it differently, the company’s retention money ideally should have been around Rs 250-300 crore.

So the amount on the books appeared way too high. Why was that so? Now Avigo representatives were on the board. I suppose they would be aware of this issue as well. What was their stance about this? Wonder if this was also among the issues LPs had with the GP team? Was this one of the issues around the ‘negligence’ concern reported in ET.

PS: The papers have subsequently reported an out of court settlement between GPs and LPs

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