Private Equity

Private Equity - Concept

Private equity refers to shares in companies that are not listed on a public stock exchange. It is a situation where in there is no traditional market place, such as a stock exchange to sell or buy investments. Hence a private equity firm has to find a buyer in absence of a market place, where the transfer of private equity is strictly regulated.

Private equity firms raise funds for investment in unquoted companies, to help them grow and succeed. If one is looking to start up, expand, buy into a business, buy out a division of the parent company, turnaround or revitalize a company, private equity can help in doing so.

Private equity is invested in exchange for a stake in a company and as shareholders; the investors' returns depend on the growth and profitability of the business. Post-2000, a few additional categories have been introduced to the PE market. These include companies involved in various aspects of real estate financing, investment companies and special purpose vehicles [SPVs], established for offering financially engineered products to investors, and equity interests in secondary PE funds.

Private Equity in India: Growing in stature and size

The Indian private equity market is truly a happening place. Private equity is now attracting mainstream attention owing to India emerging as a growth capital market. The total investment made in the private equity segment has seen a sharp growth, from a mere USD 20 mn in 1960 to USD 1.75 bn in 2004. In 2005, private equity firms invested USD 2.3 bn in India while investments in 2006 amounted to over USD 7 bn.

In terms of sheer numbers, India's investment kitty is barely 6-7 % of the global pie. It is not even the largest investment destination in Asia Pacific. That position belongs to China, which has roped in over $6 billion in funding in the last three years.

However India remains a promising destination of private equity investment for the following reasons:-

• Currently, the Indian economy is the twelfth largest in the world and the 4th largest in terms of purchasing power parity. According to Goldman Sachs (BRIC report) India will be the 3rd largest economy on PPP basis by 2032.

• India's GDP growth has been strong at 6.2 % over the last 10 years and over 8 % in the last three years. India's GDP growth has been the highest across Asian economies.

• India has a younger population with a higher propensity to spend, generating large domestic demand.

• 56 % of India's GDP is contributed by service sectors such as IT, healthcare, telecommunication, retail, etc. Over 50 per cent of Fortune 500 companies outsource to India.

• India is among the top 10 holders of foreign currency reserves with reserves of USD 165 billion.

• India has a highly sophisticated and vibrant stock market, with more than 9000 listed companies. FII inflows have been around USD 20 billion in the last two years ending FY06. A robust IPO market has enabled easy exits.

• Indian companies have shown strong profit growth at over 4.5 per cent of GDP. Efficient utilization of capital has resulted in higher return on equity (ROE). Corporate governance standards have been high and seen significant improvement in recent times.

• The government has successfully undertaken deregulation of key sectors viz. Telecom, Insurance and Retail. This has led to an increased pace of activity in these sectors, with large foreign players making investments in these sectors.