Money Matters saga puts the spotlight on many poor decisions and sour exits of institutional investors

Private equity firms and foreign institutional investors attract a lot of admiration. Of late, several big boys from the institutional world have suffered heavy losses in their multi-million dollar investments

A relatively obscure firm, Money Matters Financial Services, is now a household name in India, for all the wrong reasons. Reports of its involvement in bribing senior officials of public sector banks and institutions, for facilitating big-ticket loans to property developers, has raised many eyebrows. But what still remains a mystery in this saga is how this firm, with questionable pedigree, managed to attract a stupendous Rs445 crore from renowned institutional investors, just one month before its chairman, Rajesh Sharma, was under CBI investigation for brokering deals through political connections. Four FIIs-Morgan Stanley, Wellington, Fidelity and GMO-put in as much as 60% of the funds into the firm through a qualified institutional placement (QIP) in late October.

After recent developments surrounding the firm, these renowned institutions have seen massive erosion in their investment, with the stock price of Money Matters Financial Services plunging 46% from Rs787 in late October to Rs425 today. It leaves one wondering what due diligence was carried out by these high profile investors. But this is not a one-off hiccup; several leading private equity players have been finding themselves at the wrong end of the bargain recently. The aura of infallibility surrounding these firms has taken quite a knock as a result.

Several leading PE firms have recently cashed out of their investments, booking substantial losses in the process. Two years ago, New Silk's investment in high-profit 9X media group crashed and burned. The most recent instances are the exits of Warburg Pincus and ChrysCapital from auto components manufacturer Amtek India. Warburg Pincus recently sold over half of its 7.45% stake in the company taking an estimated 63% hit on its portfolio. This was followed closely by the exit of ChrysCapital from its entire 8.17% stake in the company, which is estimated to have put it in the red by up to 20%. Another PE firm, Citigroup Venture Capital International (CVCI), carved out an 11% loss when it cashed almost 7% of its 10.44% stake in Jindal Drilling recently.

It is unusual for PE firms to report such heavy losses, when they are known to make multi-fold gains from their investments in small, growing companies. They are usually known to march in with oodles of cash, pick up gigantic stakes in growing businesses, often work with the management to improve performance and almost always, exit at a massive profit. The multi-billion dollar deals inked by these high-profile firms make the headlines for the whopping amounts invested, as also for the fabulous returns generated on those investments.

This has even led to an assumption that PE investments can rarely go wrong, that their ideas always work out in the end. For, PE firms are supposed to be ideally equipped for stock-picking as they are armed to the teeth with expert knowledge of companies, sectors and markets. They are supposed to be highly selective and undertake detailed research, before plonking big amounts of money into companies that have great potential. They make bigger, more concentrated and longer-term bets on companies than any other kind of investor.

History is filled with glorious tales of big-ticket profits made by PE firms. ChrysCapital's entry and exit from Suzlon and Shriram Finance at huge profits were the envy of the PE community some years ago. Last week itself, ChrysCapital reportedly made a blockbuster exit from software giant Infosys at a phenomenal profit of almost 130%.

So what went wrong with the recent exits by some of the leading players in this field? Warburg Pincus is to be blamed for making the purchase at an inappropriate time-it bought the bulk of its stake in the fourth quarter of 2007, which was near the market peak. ChrysCapital's investment in around mid-2008 also was not exactly a perfect time to enter the stock. CVCI suffered a similar fate. However, Warburg Pincus also made a terrible bet on Moser Baer. This was one stock about which the market was always sceptical. Its accounting was seen as unreliable, especially since CDs (compact discs) were hardly a high-margin business. Very few FIIs seriously bought this stock. Warburg Pincus was alone in keeping the faith for a very long time, which turned out to be misplaced.

This only proves that even the most seasoned experts are just as prone to making wrong judgements as anybody else. Things don't always work out as desired for professionals too.



R Balakrishnan

7 years ago

In all cases, there is 'setting'. Most of the firms like Money matters also specialise in placing 'blocks' of shares at inflated prices, with money managers, domestic and foreign. FII is not snowwhite. As corrupt as they come.And if there are Indian origin guys out there, so much easier. Not all, but many of them are corrupt.


7 years ago

Goldman Sach's recent investment in Vikas WSP is a similar story



In Reply to Rajesh 7 years ago

how does it matter for people like goldman. bernanke bhai hai na. thoda aur note chap dega! which instituions put money in so many suspect ipos? a lot of it could also be promoter money and political being routed through FII under its name.

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