WHAT IS PRIVATE EQUITY?

In simple words and at a very basic level PE funds are just like any other Investment funds (eg. Mutual funds), the primary difference being the source of funds and the time horizon. PEs gather money from financial institutions, big business houses as well as other funds like pension funds and high net worth individuals. Small PE funds generally target young companies with a promising future but in need of money. Big PE funds also buy stakes into established businesses expected to grow faster and yield super normal returns.

WHAT IS PRIVATE EQUITY?

PE funds normally have a long investment horizon, anywhere between 7-10 years, though in the Indian context, many funds are looking for a smaller time horizon of 3-5 years. PE funding is a sort of partnership wherein the PE firm acts as the managing and working partner. PE fund generally makes some 15-20 investments over its life span. It acquires a substantial share of the firm and also negotiates. The stage at which the PE firms invest is (Growth or Expansion) generally next to the Venture Capitalist, seeking a little more mature bet.

INDIAN SCENARIO :

PE industry is in a very nascent stage right now, but in the recent past these funds have shown keen interest and raised India-dedicated funds. The average deal size and the average number of deals both have shown a phenomenal increase of about 1.5 times over the last year Private Equity (PE) and Venture Capital firms crossed the historic figure of $3.47bn in the first six months of 06. Profits posted by listed companies backed by private equity (PE) firms grew at nearly double the pace of the broader market in 2010, but the performance of their stocks has been mixed, with over half of them underperforming the Nifty.

CURRENT SCENARIO?

For the year 2010, India's M&A deal value has reached a whopping USD 68.3 billion, having grown three-folds compared to the value recorded in 2009. Jindal Poly Films (JPFL) plans to go for private equity investment in its subsidiary Jindal India Thermal Power. Karbonn Mobiles in talks with US PE firms for raising Rs 230 crore. A Mint analysis of earnings at 67 PE-backed listed companies shows that aggregate profits grew 46% in the 12 months to 30 September 2010 from the year-earlier period. Profits made by the 50 companies that make up the Nifty rose 11% in the same period, while BSE 500 companies saw a 26% growth. Kohlberg Kravis Roberts and Co. (KKR), one of the worlds largest private equity (PE) firms, has started offering debt finance to Indian corporations to complete its suite of products.

FUTURE (WHAT IS EXPECTED)

With returns under pressure, private-equity firms will struggle to perform. With an estimated $470 billion in committed but unused funds, the sector faces an enormous challenge just finding ways to invest. Finally, its portfolio companies, with their high debt levels, may become financially distressed and default in the event of only small downturns in sales and EBITDA. India is one of the fastest growing economies. This means that capital requirements are high, translating into an ideal hunting ground for PE funds.