Sunday, April 29, 2007

Wedding of the century

The media hype over the Abhishek-Aishwarya Rai wedding left me cold. The amounts spent and the people who showed up- or didn't- are of little interest to me. But I did wince at the mumbo-jumbo of superstition and ritual to which the Bachchans gave currency. I mean, all that stuff about getting rid of 'mangal dosh', the endless darshans at temples and the rest. I am happy to find myself in august company. Outlook magazine has done a splendid job of getting reactions from a cross-section of writers, film-makers and intellectuals. The comments are scathing. Here is a sample:

Kiran Nagarkar, Writer
"What do we make of his grand donations to temples? That he is covering his front and back, but God doesn't give any insurances."

Arvind Krishna Mehrotra, Poet
"When they fall ill, why don't they just go to an ojha? Why do they go to a doctor?"

Rajendra Yadav, Writer
"They are busy collecting certificates from the various gods and goddesses. It shows a deep insecurity within."

Reporter Smriti Koppikar writes:

Noted writer Sunil Gangopadhyay says: "Amitabh Bachchan seemed to behave like an uneducated and illiterate person, the repository of outdated superstitions and dark beliefs, which doesn't behove him at all." Add to that Jaya Bachchan's comment that Ash would make a "good bahu" because she is "silent and stands behind". If it has been a long journey for Amitabh, it has also been a rather curious one for Ash, from independent career woman to demure bahurani.

Such a pleasure to see somebody call a spade a bloody shovel.

Wednesday, April 25, 2007

IIM admission saga

So where do we stand now? The Supreme Court has advanced the hearing of the constitutional validity of the OBC quota bill to May 8. Does that mean that the matter will be resolved then? Not, if we go by one newspaper report. The report says that the Chief Justice had asked the parties to complete their representations in 10 days' time. That would take the court hearings upto May 18. The SC could conceivably take some time thereafter to give the verdict.

Who will hear the matter now? Will it be the two-judge bench of Pasayat and Panta that stayed the OBC quota or a new bench to be constituted by the CJ? Will that be another two-judge bench or a larger bench for hearing a constitutional matter? We don't know yet.

Now that the court hearings seemed poised to stretch upto late May, it does appear that the HRD ministry will allow the IIMs to release their admission lists as per last year's intake.

There were one or two things about yesterday's proceedings that caught my eye. First, the government seems to have responded deftly to the SC's refusal on April 23 to vacate the stay. The Attorney- General was asked to mention the matter in court when the CJ was presiding. The SC rules do not permit mention of any matter unless it is scheduled but, apparently, there is a provision in the rules that makes an exception in favour of the Attorney-General.

Secondly, there was a rather charged exchange between the counsel for the petitioners and the CJ. Counsel P C Lahoty argued that for the government to mention the matter before the CJ was not in conformity with SC procedures and the matter could mentioned only before the two-judge bench. The CJ asserted that it was his preorogative to decide the date of the hearing. The CJ was quoted as telling Mr Lahoty who had raised his voice, "You may give a speech elsewhere".

Today's Indian Express has an article by Pratap Bhanu Mehta which lambasts the IIMs for caving in to the HRD ministry when the latter issued a directive asking that admissions be put on hold. Mehta thunders, "A terse one-line order issued by a joint secretary of the Government of India was enough to bring India’s mightiest institutions to their knees".

Mehta is getting carried away. The JS's letter mentions that the orders had the approval of the "Competent Authority" (read, minister). In the present framework, the relationship of the IIMs to the HRD ministry is not very different from that of ONGC to the petroleum ministry or the nationalised banks to the finance ministry. As the minister pointed out yesterday, the IIMs may be autonomous but they are not "independent". For the IIMs to defy the order could have been illegal. It hardly behoves such institutions to violate the law.

Incidentally, each week in this long-running saga brings a new twist- you could be watching a TV serial.

Tuesday, April 24, 2007


The latest issue of Outlook magazine has a terrific story on the IITs' prestigious entrance exam, JEE (Coaching Factories Are Dumbing Down The IITs).

Sugata Srinivasaraju reports that two distinguished IIT alumni (one of them B Muthuraman, Tisco MD and an alumnus of IIT Chennai) have said that standards at the IITs have fallen.

Their remarks have questioned the calibre of students who make it into the IITs by subjecting themselves to the killing rigours of coaching factories in places like Kota and Hyderabad. The alumni seemed to conclude that these products of coaching factories—who now form, according to Wikipedia, 95 per cent of students at IITs—had a blinkered approach to education, did not recognise new ideas and had lost the spirit of inquiry and innovation. In short, elements that had built Brand IIT over the decades had now gone missing.

The root of the problem seems to to be the JEE and the sort of students who are able to make it through the JEE.

The JEE tests are said to be of an irrationally high standard, which makes students depend on intensive coaching at the cost of systematic scientific education and normal teenage activities.

Take a look at the critique of three IIT Kanpur professors on the JEE system in an in-house journal. Prof Vijay Gupta writes: "Teaching and coaching are two different kinds of things. Even the best coaching does not attempt to clarify concepts. It does not inculcate the spirit of inquiry. It does not train persons in starting from first principles. Instead it relies on pattern recognition. Do enough problems so that when you see a problem in the exam, you can recall the special trick required to obtain the answer.... Most entrants into IITs have not read a single book in their last three years or so."

Prof B.N. Banerjee touches upon his classroom experience: "JEE has spawned a system that reduces young people to automatons, in more senses than one. They not only become robots in academics, as all of us can see in our core teaching encounters, they even resemble one another in personality. Gone are the sparkling eyes and scintillating engagements that used to be the teacher's joy

Strong words, these. As somebody who has the same concerns about the IIMs and their CAT, I have no difficulty endorsing these. Getting through CAT is largely a matter of intense preparation, perfecting a certain drill. Those with an engineering background and, for some reason, an IT background, are better equipped to get through. But these are not necessarily the cream of managerial talent. There is a great deal more to being a good manager than clearing an aptitude test.

One of the concerns of faculty at the IIMs is that the proportion of engineers in a batch has been rising relentlessly- it is said to be close to 90% now. About a decade ago, the proportion was much lower. There are some who counter this by saying that in India, the better students opt for engineering or medicine and only the rejects to go other streams, so such an outcome is only to be expected. Even if this is true, the best among the other streams do not stand a chance of making it- and that is a tragedy.

A possible solution would be to have differential cut-off scores for engineering and other streams. This, I am told, is attempted but there are limits, we are told, because if you take in people with very low quantitative scores, they may not survive once they get in.

Another possible solution is to increase the short-list for the group discussion and interview stage. That would give an opportunity to talented people who miss out today because they are not in the top percentile in CAT. In other words, call, say, 2000- 3000 people for interview instead of 900, as happens at IIMA. The limitation here is faculty time. As it is faculty are stretched over weeks to do the GD/interviews.

A big problem for IITs and IIMs is the sheer size of the applicant pool. When you get 200,000 applications, you simply can't evaluate each application. At the top US schools, the total number runs into a few thousand. So, after applying a cut-off GMAT score, they are able to screen applications closely.

There are no easy solutions. Besides, you are bound to end up with good students and they are bound to get fantastic placement salaries, so the incentive to find solutions is rather weak. But whoever is able to propose an alternative approach to talent spotting will at IIMs will be making a big contribution.

Monday, April 23, 2007

PPPs for IITs?

Two IIT professors have mooted the idea of public-private partnership for IITs in an article in today's TOI.

They argue that the government, on its own, may lack the funds to set up IITs. Moreover, once under government control, IITs face limitations- notably, in respect of salary structures. The solution? The government provides some of the funds. The private partners brings in funds and manages the institution.

In an era of public-private partnerships (PPP), it is worth extending the PPP approach to starting new IITs. Private sector dynamism and long-term social commitment of the government can come together to create quality institutes. A modified BOT (build-operate-transfer) model can be applied here.

The government can specify norms for an IIT and its support for the project. These norms can include autonomy, selection process for students and faculty, reservations, governance structures, and conditions for financial support, such as what it will provide per student and per faculty. It can also specify norms for giving the landand its share of the initial capital for a new IIT.

With these guidelines in place, the government can invite respected individuals and business houses for a partnership to start a new IIT. The project can be executed by the partner, who, apart from bringing his share of the initial capital, can go on to provide ongoing support to the new IIT. This would be in addition to the government lending support as per its norms.

The official salary scale of the IIT faculty can remain the government-approved scale, this coming from government grant. However, the private partner can provide additional compensation to the faculty, pegging this to market levels.

The private player can also provide funds to invite faculty from abroad, something that is difficult to do from government funds. In general, funds provided by the private partner can be used for activities that cannot be undertaken with government money....

Since the new institution is an IIT, it would be eligible for research grants and partnership programmes. A fully private university in India will find it almost impossible to support research, as can be seen in most existing private institutes, including well-funded ones. With research funding available from regular funding sources as well as multilateral agencies, an exciting environment can be created, particularly with leadership support from the private sector

Sounds attractive. If we can have PPPs in infrastructure, why not in education?

I have serious reservations:

  • The private partner, presumably, will be some corporation or business house. I am not aware of any top notch educational institution that is managed by a corporation. In the US, corporations and businessmen give generously to universities. But they don't ask that they should run the institution.
  • We keep talking of a role for the private sector in education. The one place where this has been a success is the US. And in the US, the entities that run top universities are private but non-profit. Here in India, privately run engineering, medical and business schools are all commercial ventures, many of them focused on making a fast buck. The whole culture of non-profits funded by philanthropy is peculiar to the US. It is not commonly found elsewhere.
  • If Indian businessmen were interested in creating a non-profit in education, we would have had a credible institution by now. In engineering, there is no private institution that matches the IITs' reputation- BITS, Pilani comes closest. In the medical field, AIIMS has no peers. And in management, once you exit the IIM system, you descend quickly into mediocrity. How come private management has not created a single institution of higher education of any class? That is at least partly because educational excellence and a commercial orientation do not go together. Either the state subsidises excellence or private philanthropy does. There is always an element of subsidy in academic excellence.
  • What about fees? The authors concede this could be a problem area. Given the profit orientation of private parties in education, we will have a situation where the government puts in money and provides land only for private parties to rake in huge surpluses through the high fees that the IIT brand can command.
  • Governance of the PPP could pose major problems. Now we have the government as monitor. With all its drawbacks, such monitoring has created institutions of repute such as IITs and IIMs. The culture of freedom and egalitarianism that is the trademark of a great educational institution- will it survive under the auspices of a business house? I doubt it.

Granted, both the IITs and IIMs need to move on to the next level. But state sponsorship need not be an impediment. There are great names in US education that are state-run: the university of Californio, the University of Texas and Ohio state university. At the IITs and IIMs, it would be much easier to make the incremental changes needed under state control than through a wholesale shift to private control.

Let me emphasise one more thing: we can loosen state controls on these institutions by all means but we must be careful to put in alternative governance mechanisms. Leaving matters to faculty is not the route to take.

IIM admissions (contd)

The saga of IIM admissions, stalled over the OBC quota issue, drags on. Today the Supreme Court will take up the government's petition. Note, however, that the government has moved swiftly to squelch one of the principal criticisms of the government's order to the IIMs to put admissions on hold. This is that students would end up paying through their nose by way of non-refundable fee(deposit) as they would not be able to finalise their choice of b-school until the IIM admission uncertainty was resolved.

IIM Admission: Don't worry, you can wait now (ET,April 22)

The AICTE has asked all technical education institutions, universities and deemed universities providing technical education, that is managment, engineering, pharmacy, architecture, to only charge a maximum of Rs 1,000 from students who withdraw from a course before the academic session begins.


Critics say that the SC has only put OBC quotas on hold, so why should the others suffer? As I have argued earlier, the counter to this could be: why should only the OBC category suffer?

On Times Now TV the other day, Harish Salve pointed out that there was no outcry when the SC stayed the Mandal Commission recommendations on quotas on government jobs, so why the hullabaloo over the present stay? Incidentally, apart from Salve, three other participants in the discussion- PM Bhargava of the Knowledge Commission, Pratap Bhanu Mehta of the Centre for development studies and Shiv Khera, the public speaker, bashed the HRD ministry for interfering with the IIMs' 'autonomy'. They also contended that the IIM directors should have defied the ministry's dictat.

I am not very sure. My understanding of 'autonomy' at IIMs is that they are independent of the university system and are free to grant their own diplomas. I doubt that 'autonomy' means independence from government. As for defying the ministry, that would conceivably mean violation of the Memorandum of Agreement between the ministry and the IIMs- a point highlighted in the ministry's communication.

Sunday, April 22, 2007

After Kalam who?

On April 21, NDTV carried the results of polls they had run on who should be president after Kalam. Of 200,000 people polled in urban India, nearly 50% wanted Narayana Murthy as Prez. Next was Amartya Sen. The politicians ranked pretty low in their preferences.

NDTV also polled 520 members of the electoral college that will elect the next president. Somnath Chatterjee and Bhairon Singh Shekawat topped the lists, each getting more than a quarter of the vote. Narayana Murthy got a mere 5% of the vote. Incidentally, some 57% said they would like to have Kalam continue for a second term.

What do the results tell us? The urban middle class wants a non-politician like Narayana Murthy to be Prez. The politicians think otherwise. So the chances of Murthy or any other non-politician getting the job are low.

Saturday, April 21, 2007

IIM admissions

IIM admissions are on hold again. ET reports:

The IIMs have decided to announce their admission lists only after further communication from the government. Though the government and IIMs can now breathe easy that they have avoided any confrontation, it’s the aspirants that have been left on the tenterhooks.

The IIMs had earlier decided that they wouldn’t wait beyond April 21 to announce their admission lists. On April 5, the central government had asked the IIMs to hold their admissions in abeyance. The government has petitioned the Supreme court to vacate its stay on the implementation of the new quota regime, which will provide 27% reservation for other backward classes (OBCs). The petition will be taken up by the apex court on Monday

The IIMs had proposed a two-stage announcement of results. First, they would announce the general category list. After the OBC quota position was clarified by the SC/government, they would release the second list pertaining to the expansion in seats. The HRD ministry's position thus far has been: all or nothing.

The IIMs call about 2000 people for interview. These candidates will have received offers from other b-schools with deadlines for acceptance. The problem is that on accepting an offer, candidates have to fork out large sums as non-refundable fee/deposit. At XLRI, the amount is Rs 1.76 lakh out of a total fee for the first year of Rs 2 lakh. Getting loans to finance such deposits is not possible. Middle-class families will have a tough time raising cash to pay deposits pending the announcement of IIM results.

The problem is not confined to the 2000 or so candidates awaiting IIM results. There are second-round effects on other students. When a candidate who has got into an IIM turns down the offer from a second-tier business school, his seat becomes available to somebody who has accepted an offer from a third-tier busines school. So, candidates hoping to get into a second tier business school will now have to think of paying the deposit at a third-tier school. The cumulative financial costs could be fairly heavy.

However, even if the IIMs' plans for announcing the general list go through, the OBC candidates will face the same problem until the quota issue is resolved. You could argue: why should one set of students alone face uncertainty and the resultant costs?

Well, there are those who contend that the SC has stayed only the OBC quota; it has not asked for the general list to be put on hold. It is the ministry that has asked for the latter. On TV yesterday, I heard lawyer Harish Salve raise the issue of IIMs'a autonomy in such matters. Does a joint secretary in the HRD ministry have the right to issue such a fiat, he asked? (The JS, in his communication, does mention that the order to the IIMs has been cleared by the 'competent authority'- read, minister). Salve also said something about raising this matter in the SC on April 23.

I guess we have to await the SC's orders on April 23.

IMF upbeat on economic outlook

The IMF's latest World Economic Outlook (April 2007) is surprisingly upbeat on global economic prospects. In 2007 and 2008, the IMF expects the world economy to grow at 4.9%, down slighlty from 5.4% in 2006. For India, the projected growth rates are 8.4% and 7.8% compared to 9.2% in 2006. I can understand the deceleration projected in India in 2007. I can't figure out why there should be further deceleration in 2008.

The key point in the IMF report is about how the world economy is likely to be "decoupled" from the US economy in the next couple of years. The US economy itself is projected to slow down sharply from 3.3% in 2006 to 2.2% in 2007 before reviving to 2.8% in 2008. But, despite the size of the US economy and its close linkages with the rest of the world, the global economy is likely to steam ahead. Why?

Because deceleration in the US will be because of US-specific factors, chiefly the slowdown in housing, which has relatively little impact on the rest of the economy. In the past, US economic slowdowns impacted significantly on the rest of the world only when the factor responsible for- say, the collapse of IT boom in 2002 or the oil shock of 1974- was common to the rest of the world as well.

For a detailed exposition on the subject, see my latest ET column.

Thursday, April 19, 2007

Straight talk

World Bank president Paul Wolfowitz is hanging on grimly to his job. The White House has expressed its support and that is crucial. But I like the fact that top managers at the World Bank have told him to his face that he should go. I can't think of many situations where professionals show that kind of courage. FT reports:

One of Paul Wolfowitz’s two deputies on Wednesday urged the World Bank president to resign as the civil war inside the institution reached top management.

Graeme Wheeler, managing director, made his call in front of all the bank’s top officials at an extraordinary session of their regular weekly meeting.

It is understood that other top managers of vice-president rank also suggested Mr Wolfowitz should go.

But Mr Wolfowitz – who has been under growing pressure following revelations that he was personally involved in securing a big pay rise as part of a secondment package to the US state department for his girlfriend Shaha Riza – told the meeting he had no intention of quitting.

IIMs and HRD ministry

Admissions to the IIMs this year are proving to be a messy affair. The IIMs had wanted to release the admission list to April 12. Since the matter had gone to the Supreme Court, they moved the date to April 21. The IIMB director was quoted as saying the results would be on out April 21 "come what may". Now, we hear that the IIM directors are to be meet in Delhi on April 20 to take a final decision.

The SC has posted the matter for hearing on April 23. The IIMs say they would like to release the list for the general category on April 21. Based on the what ensues from the hearings in the SC, they will take a decision on the OBC quota later on. They say this will minimise inconvenince and financial loss to students in the general category who will also be having offers from other business schools. But does this mean that students in the OBC category will be subject to inconvenience and financial loss and not those in the general category? After all, that would be the outcome if the general category were released separately from that of the OBC category.

With the HRD ministry appearing to stick to earlier directive to the IIMs to put admissions on hold "until further orders", we seem to be approaching a repeat of the showdown between the IIMs and the ministry during the time of Murli Manohar Joshi.

There was one point about the ministry's petition to the SC that struck me. The ministry argues that the SC had accepted the concept of OBC reservation in the Indra Sawhney case. But in that case, the SC had expressed asked for the exclusion of the "creamy layer". Had the provision for OBC quotas excluded the "creamy layer", the ministry may have been better placed to argue that parliament's actions are consistent with the SC's earlier judgement.

I had a chance to present my views on OBC reservation in IITs and IIMs in a debate organised by the Economic Times

I highlight one of the less publicised facts about IIM admissions. Standards for SC/ST categories are lower than for the rest but they are still pretty high- they are, in fact, comparable to the standards at the best b-schools elsewhere in the world. Indeed, there is a view that, given the quality of talent in the applicant pool for top schools, selection by lottery would be as good as any admission process!
We can expect OBCs to come in somewhere between the general category and the SC/ST category. That would mean a high level of performance. So, I just don't buy the argument that OBC reservation will dilute the famous IIM brand.

But I do believe that reservations should not be there in perpetuity. Then, reservations become a means for certain groups to grab spoils for themselves. Reservation policy for OBCs must include mechanisms that allow the policy to self-destruct once the goals of the reservation have been achieved. As groups graduate out of backwardness, they must cease to be eligible for reservation.

Saturday, April 14, 2007

Citigroup woes- the travails of bank mergers

Citigroup will slash 17,000 jobs in order to get a grip on costs. The stock has been an underperfomer for the past five years and the Citigroup CEO Chuck Prince is under pressure from shareholders to show results.

But wait a minute. Wasn't this bank supposed to be effecting huge savings from the mergers of earlier years? Clearly, those savings have failed to materialise. As somebody who has long been sceptical of bank mergers, I am not surprised. Cost savings and synergies are difficult to realise in any merger. In a bank merger, the difficulties are even greater. An edit in FT (April 11) puts it very well:

In the early days of bank mergers, there are some easy wins. It is relatively simple to put together Treasury operations and, at least in the US, close overlapping branches. Investment banking arms can also be reshaped although investment bankers are easily upset and disinclined to save money for the greater corporate good.

But slapping some new signs on branches only goes so far. In the longer term, retail banks are tough institutions to remould. National Westminster Bank’s troubles in the 1990s, which led to its takeover by Royal Bank of Scotland in 2000, were partly due to bloat from its founding merger in 1968.

Old technology cannot simply be ripped out and replaced because computer systems – and often paper files – carry customer and loan information that have to be retained. Tight central controls on credit must co-exist with local oversight of lending. Many different products from credit cards to insurance, must be managed well.

Add to this the complexity of cross-border mergers. Citigroup wants to expand internationally, as its takeover bid for the Japanese broker Nikko Cordial shows. European banks are venturing into such mergers and Barclays is discussing with ABN Amro sensitive issues such as head office location.

The lesson is twofold. First, do not underestimate how difficult it will be to gain enduring value from a merger after the initial gains. Second, keep working to implement mergers, even years after the event. Having failed to obey both principles, Citigroup is struggling to salvage its reputation

Banks in the US and Europe at least have some compulsion to merge- they find it difficult otherwise to sustain growth in profit. Here in India, that compulsion is missing. In today's environment where commercial credit is growing at 30% and profit growth too is healthy (despite rising interest rates and stiff provisioning requirements imposed by RBI), mergers among the top banks can hardly be a priority.

Friday, April 13, 2007

Wolf at the door

What a fall, my countrymen! World Bank president Paul Wolfowitz, doughty crusader against corruption at the Bank, has been caught on the wrong foot himself. Wolfowitz is accused of having favoured a lady colleague with whom he has been romantically linked. FT reports:

Paul Wolfowitz was under pressure to resign as president of the World Bank on Thursday after admitting he was personally involved in securing a large pay rise and promotion for a Bank official with whom he was romantically involved.
The Bank president issued a public apology, saying: “I made a mistake for which I am sorry”.

The apology came after the Financial Times revealed that Mr Wolfowitz ordered the World Bank’s head of human resources to offer Shaha Riza the pay rise and promotion as part of a secondment package.
The instructions were set out in a memorandum dated August 11 2005 to two sources who have seen the document.

...In the August 11 2005 memorandum, two sources told the Financial Times, Mr Wolfowitz directed Xavier Coll, the Bank’s vice-president for human resources, to offer Ms Riza specific terms as part of a secondment package to the US State department.

These included a promotion, a pay rise above that normally associated with the promotion, and arrangements to ensure Ms Riza received exceptional annual pay increases. Only the promotion had been recommended by the board’s ethics committee, two sources told the FT.

A former hawk at the Pentagon, Wolfowitz rubbed the members of the World Bank board the wrong way with his focus on fighting corruption in countries to which the Bank made loans. He angered his colleagues at the Bank with his ham-handed attempts at fighting corruption within the Bank. As happens so often, the system got back at somebody who was rocking the boat a wee too much. As the FT notes, even if Wolfowitz survives the present crisis, he can only carry on with his moral authority greatly diminished.

Thursday, April 05, 2007

The lure of private equity

Until recently, the buzzword in the world of finance was 'hedge funds'. Now it is 'private equity'.

Private equity funds typically position themselves somewhere in between venture capital and IPOs. That is, they invest in companies that have started up but have not gone public. Another big activity of such funds, which is making waves, is taking public companies private. These funds buy out existing investors, including retail shareholders, delist the company, restructure it beyond recognition- and sell it onward or often take it public all over again.

Private equity funds attract hostility, especially from workers, because they focus relentlessly on slashing costs. They are denounced as "asset strippers". The truth, however, is that private equity firms cannot afford to neglect investment or innovation because then they cannot hope to add value to the firm.

If private equity firms do not add value to the business they acquire, they cannot generate returns for their investors. Institutional investors who park their funds at private equity funds are willing to wait five to seen years for returns. At the end of the period, however, they will want their money back- with returns. If a private equity fund fails to deliver, the private equity firm cannot raise fresh money to stay in business- the reputational effects of failure are enormous.

Private equity is not new. It gained prominence in the eighties through "leverage buyouts (LBOs)" of companies- that is, purchases made through huge amounts of borrowing. One man who made the borrowing possible was Michael Milken, the investment banker at the now defunct firms of Drexel, Burnam Lambert. Milken created the "junk bond" market- debt instruments with high yields that was used in LBOs. Milken ultimately ended up in the can. He was portrayed as a scamster who profiteered from insider trading. This view has, however, been hotly contested. Many see the jailing of Milken as act of revenge on the part of a corporate establishment that did not take kindly to being challenged by upstarts.

Private equity emerged chastened from its earlier experience. Private equity firms still make use of large amounts of debt but not as much as in the past. When debt is too high in relation to a private equity firm's equity capital, that tends to create incentives for excessive risk-taking. Today private equity firms come into a deal with more of equity than before.

On the face of it, it seems odd that anybody would want to put money in private equity funds. The fees are much higher than in the mutual fund or even hedge fund business. A private equity firm will charge a minimum of 3-4% on funds managed plus 20% on profits. There are also acquisition fees, disposal fees etc. An investor can get a piece of a company by paying less than 1% in brokerage. Mutual funds charge just a little more. If private equity attracts money despite high fees, it is because the returns they generate net of fees are still high.

On the average, private equity firms do not outperform the S&P net of fees. But, the top performers do. What is more, unlike among mutual funds, the top performers continue to do well year after year- there is 'persistence' in performance.

Public firms being taken private and doing better is an astonishing phenomenon. And we all thought that being a listed public company was what brought out the best in management- the fabled 'discipline of the capital market' !

Some would rather glibly ascribe the superior performance under private equity to excessive regulation of public firms- Sarbannes Oxley, for instance. This is not true. There are good reasons why private equity firms do better. I touch upon these in my latest column in ET.

For a review of private equity, see the Economist (February 10, 2007).