1. SECTOR OVERVEIW
1. Equity capital that is not quoted on a public exchange.
2. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
3. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.
4. The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time.
5. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.
6. Among the most common investment strategies in private equity include leveraged buyouts (LBO), venture capital, growth capital, distressed investments and mezzanine capital.
2. PRIVATE EQUITY STRATEGIES
1. Leveraged Buyouts (LBO):
1. The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.
2. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company.
3. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
2. Venture Capital:
1. Financing for new businesses. In other words, money provided by investors to startup firms and small businesses with perceived, long-term growth potential.
2. This is a very important source of funding for startups that do not have access to capital markets.
3. It typically entails high risk for the investor, but it has the potential for above-average returns.
3. Growth Capital:
1. It is equity investments, most often minority investments, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.
2. Growth capital can also be used to, effect a restructuring of a company's balance sheet, particularly to reduce the amount of leverage (or debt) the company has on its balance sheet.
4. Distressed Investments:
1. Distressed or Special Situation is a broad category referring to investments in equity or debt securities of financially stressed companies.
2. The "distressed" category encompasses two broad sub-strategies including:
1. "Distressed-to-Control" or "Loan-to-Own" strategies where the investor acquires debt securities in the hopes of emerging from a corporate restructuring in control of the company's equity.
2. "Special Situations" or "Turnaround" strategies where an investor will provide debt and equity investments, often "rescue financing" to companies undergoing operational or financial challenges.
3. In addition to these private equity strategies, hedge funds employ a variety of distressed investment strategies including the active trading of loans and bonds issued by distressed companies.
5. Mezzanine Capital:
1. A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.
2. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full.
3. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies.
4. Since mezzanine financing is usually provided to the borrower very quickly with little due diligence on the part of the lender and little or no collateral on the part of the borrower, this type of financing is aggressively priced with the lender seeking a return in the 20-30% range.
6. Secondary Investments:
1. Secondary investments refer to investments made in existing private equity assets.
2. These transactions can involve the sale of private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors.
3. Secondary investments provide institutional investors with the ability to improve vintage diversification, particularly for investors that are new to the asset class.
4. Often investments in secondary are made through third party fund vehicle, structured similar to a fund of funds although many large institutional investors have purchased private equity fund interests through secondary transactions.
5. Sellers of private equity fund investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds.
3. INDIA’s PRIVATE EQUITY MODEL
1. Business in India operates with a considerable degree of freedom from political interference.
2. Accounting systems are similar to US GAAP and there exists a large pool of well-trained managers.
3. India’s robust public markets provide a reliable route to exit.
4. Indian law prevents companies borrowing in order to make acquisitions prohibits the leveraged buyout deals. If the deal is structured outside India there can be a certain amount of leverage, but this is likely to come in at around 20 percent rather than 60 or 70.
5. Most are family-owned and although their shareholding founders are usually willing to exchange equity for cash, they also generally wish to retain control. Thus, the majority of Private Equity deals are minority investments rather than buyouts.
1. In the second quarter of 2009 global funds accounted for 32 percent of the market. Funds based in India and Asia Pacific comprise 42 percent and 25 percent respectively.[i]
2. Forty-eight percent of India-focused funds operate as overseas limited liability partnerships. [ii]
3. Current transactions have much higher levels of equity than previously seen, new types of structures are introduced, but the underlying theme remains that raising new debt for deals is challenging.
4. The stock market though recovered is more volatile which means that high returns on exit are no longer guaranteed.
PARTICULARS | As on Dec 31, 2009 (Rs. in Crore) | ||
Sectors of Economy | VCF | FVCI | Total |
Information technology | 782 | 2082 | 2864 |
Telecommunications | 767 | 3502 | 4268 |
Pharmaceuticals | 802 | 675 | 1478 |
Biotechnology | 389 | 72 | 461 |
Media/ Entertainment | 965 | 469 | 1434 |
Services Sector | 1991 | 1538 | 3529 |
Industrial Products | 1301 | 1043 | 2344 |
Real Estate | 6753 | 1432 | 8185 |
Others | 11143 | 16015 | 27158 |
Total | 24893* | 26827 | 42059 |
*includes Rs.9661 crore of FVCI investments in VCF | |||
Source: SEBI | |||
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