$ 625 million invested by Carlyle group, a Private Equity firm into HDFC is the biggest investment of private equity in India. This has come as the manifestation of faith of investor in India. Private Equity is the buzz word in this part of world.
Private Equity fund is the fund generated from a few high net individuals and ultra high net individuals or most often big investment companies who are willing to take some extra risk to earn some extra high premium. Private equity differs from normal equity in a sense that it is not traded publicly on stock exchange. The firm which generate this kind of fund to invest in private equity is known as Private Equity firm. A few examples includes Blackstone, Carlyle etc.
Mechanism :
Private equity firms raise money from the HNIs and other institution with a commitment of fund to be invested for a longer period of time say 3-5 years. Now with this money the firm invests heavily into some company which is expected to do very well not necessarily in near future but some time later. Now with heavy investment PE firm actually earn substantial say in critical decision making in the company it has invested and also play some advisory role so that its market value increases. Now once the market value of the equity has increased many folds it is sold to the public, thereby giving high return to the investors and high commission to the PE firm. This is a very risky proposition as the return depends only upon the skill of the PE firm. PE firm actually have some very qualified professional to make their investment decision.
Scope in India:
Well India is destination next for PE. The industries which are being eyed upon are Infrastructure, IT and Manufacturing and probably in the same order as well.
With economy growing at the rate of 9 % and efforts being made to maintain it, it will be necessary for India to heavily invest in infrastructure like roads, airports, ports power etc. as per the planning commission report mentioned in Business world 23rd July 2007 issue there will be investment of around $ 320 bn in next five years and out of these on $ 20 bn raised by equity, PE has big opportunity to reap in rewards.
Having said that, we have to wait and watch to find the success of PE in India. In India the promoters of company won’t be willing to forgo their hold on the company to the PE players. PE firm just invest to have capital growth without playing any advisory role. But in other part of world like USA the PE firm plays a different role all together where in it suggest some ways to unlock the undervalued company it has invested in. Hoping for mere capital growth will not give as much return as it is giving in USA. Also if it tries to interfere with management too much, there can be opposition from leftist and unions as increasing value of the firm includes some drastic cost cutting measures that may not be well accepted by the employees. PE in India in its current form is just targeting capital growth and not strategic growth.
Private Equity fund is the fund generated from a few high net individuals and ultra high net individuals or most often big investment companies who are willing to take some extra risk to earn some extra high premium. Private equity differs from normal equity in a sense that it is not traded publicly on stock exchange. The firm which generate this kind of fund to invest in private equity is known as Private Equity firm. A few examples includes Blackstone, Carlyle etc.
Mechanism :
Private equity firms raise money from the HNIs and other institution with a commitment of fund to be invested for a longer period of time say 3-5 years. Now with this money the firm invests heavily into some company which is expected to do very well not necessarily in near future but some time later. Now with heavy investment PE firm actually earn substantial say in critical decision making in the company it has invested and also play some advisory role so that its market value increases. Now once the market value of the equity has increased many folds it is sold to the public, thereby giving high return to the investors and high commission to the PE firm. This is a very risky proposition as the return depends only upon the skill of the PE firm. PE firm actually have some very qualified professional to make their investment decision.
Scope in India:
Well India is destination next for PE. The industries which are being eyed upon are Infrastructure, IT and Manufacturing and probably in the same order as well.
With economy growing at the rate of 9 % and efforts being made to maintain it, it will be necessary for India to heavily invest in infrastructure like roads, airports, ports power etc. as per the planning commission report mentioned in Business world 23rd July 2007 issue there will be investment of around $ 320 bn in next five years and out of these on $ 20 bn raised by equity, PE has big opportunity to reap in rewards.
Having said that, we have to wait and watch to find the success of PE in India. In India the promoters of company won’t be willing to forgo their hold on the company to the PE players. PE firm just invest to have capital growth without playing any advisory role. But in other part of world like USA the PE firm plays a different role all together where in it suggest some ways to unlock the undervalued company it has invested in. Hoping for mere capital growth will not give as much return as it is giving in USA. Also if it tries to interfere with management too much, there can be opposition from leftist and unions as increasing value of the firm includes some drastic cost cutting measures that may not be well accepted by the employees. PE in India in its current form is just targeting capital growth and not strategic growth.
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1 comment:
Its a very informative insight into the working of PE in firms. very simple and lucid too... keep up the good work.
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