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GROUP MEMBERS:
MANALI CHHEDA
MAYUR NAROLA
NAFISA
KURAWEDWALA
PRERNA SUKHANI
PRIVATE EQUITY
Private equity is an umbrella term for large amounts of money raised directly from
accredited individuals and institutions and pooled in a fund that invests in a range of
business ventures.
Investments in private equity most often involve either an investment of capital into an
operating company or the acquisition of an operating company.
There is a wide array of types and styles of private equity and the term private equity has
different connotations in different countries
TYPES OF PRIVATE EQUITY
Leveraged buyout
The acquisition of a company using debt and equity finance. As the word leverage implies, more debt
than equity is used to finance the purchase, eg 90 percent debt to ten per cent equity. Normally, the
assets of the company being acquired are put up as collateral to secure the debt.
Venture capital
The term given to early-stage investments. There is often confusion surrounding this term. Many
people use the term venture capital very loosely and what they actually mean is private equity
Growth capital
Growth capital refers to 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
Secondaries
• The term for the market for interests in venture capital and private equity limited
partnerships from the original investors, who are seeking liquidity of their investment
before the limited partnership terminates.
• An original investor might want to sell its stake in a private equity firm for a variety of
reasons: it needs liquidity, it has changed investment strategy or focus or it needs to re-
balance its portfolio.
• The main advantage for investors looking at secondaries is that they can invest in private
equity funds over a shorter period than they could with primaries
ADVANTAGES OF PRIVATE EQUITY
1) Funds gotten through private equity are crucial for the growth of industry
and the development of innovative products.
3) Private equity funds are helpful when it comes to facilitating mergers and
acquisitions.
4) Private equity funds make a company’s balance sheet stronger, and help it
develop.
5) Private equity funds are a great way to obtain funds for small businesses and
start-ups that have not been able to get loans or grants.
6) The general partner runs the company, so the investing partner, or the
DISADVANTAGES OF PRIVATE EQUITY
1)Since private equity funds are not open to investment on the stock
market, anybody who wants to sell stocks of a private equity fund
finds it difficult to locate a buyer.
2. Foreign venture capital funds have been permitted to operate in India since
1995. They may either hold the shares of unlisted Indian companies directly (up
to a maximum of 25% of equity) or route their investments through domestic
venture capital funds and companies. Before guidelines were issued in
September 2000, direct exposure by offshore private equity funds in shares of
unlisted companies was treated as a foreign direct investment and had to be
approved in line with the Government’s general policy on foreign investments.
Indocean Venture Fund (now Indocean Chase), originally set up by George Soros
3. The regulatory environment for the private equity industry was
simplified in 1995–2000. Foreign institutional investors participated
in the growth of the private equity industry through the foreign direct
investment regulations of the Government and the simplified tax
administration procedures under the Indo-Mauritius Double Taxation
Avoidance Treaty. While the foreign direct investment route offered
minimum investment restrictions for private equity funds, exit
pricing and repatriation of capital were regulated by the Reserve
Bank of India (RBI). To bring these capital flows under the
regulation of the venture capital industry, new SEBI regulations were
issued with simplified exit pricing and repatriation procedures for
foreign investors.
(iv) A fund must invest 66.67% (lowered from 75% in April 2004) of its investible funds in
unlisted equity or equity-linked instruments. The remaining 33.3% can be invested in
subscriptions to initial public offerings (IPOs) of companies or in debt instruments of a
company in which the venture fund has already made an equity investment.
(v) The April 2004 amendments removed the previous 1-year lockup period for IPO subscriptions.
They also allowed investments within the 33.3% category in preferential allotments of equity
shares of a listed company, subject to a 1-year lock-in, and in equity shares or equity-linked
(vi) The removal of the profitability criterion as a listing requirement had an important
effect on the private equity industry as it provided an exit mechanism for investors.
To replace the profitability requirement, a firm would be delisted if it did not earn a
profit within 3 years of listing.
(vii) The acquisition of shares in a venture fund by the investee company or its
promoters is exempt from the provisions of the takeover code and will therefore not
mandate an open offer.
(viii) Mutual funds may invest 5% of the capital of an open-ended scheme and 10% of
the capital of a closed-ended scheme in a venture fund.
(ix) In April 2004 the SEBI also removed some previous restrictions and allowed
venture funds to invest in real estate companies, gold financing companies, and
equipment leasing and hire-purchase companies registered with the RBI.
6. These regulations have significantly improved the regulatory environment for
private equity funds operating in India, such as BTS India Private Equity Fund. In
addition, they reflect the strong commitment of the Indian Government to support
the provision of long-term equity finance to domestic entrepreneurial companies
PRIVATE EQUITY: HOW IT
WORKS?
Private equity funds are set up as limited partnerships.
Changing government
policies.
Huge potential.
Young population.
And there is certainly big interest: Well over 100 private equity
funds are scouting for deals, making India the fastest-growing
private equity market in Asia, with a 67 per cent compounded
annual rate since 2002.
The survey gathered the opinions of nearly 150 global PE
investors active in India, their local counterparts, and Indian
entrepreneurs and executives.
Also ranking high were worries about whether the supply of skilled
workers can keep pace with the demand, as well as concerns that
onerous government regulations could curb India's appeal.
Their strategic input is more than just financial monitoring. Eighty percent
of the top management at PE-backed companies interact with their
investors on a weekly or monthly basis.
INDIA’S largest commercial bank, State Bank of India, has also entered the PE
segment
The robust economy, supportive government, and recent industrial reforms could
see several hundred billion dollars channeled to the newly opened infrastructure
sector alone.
IMPORTANCE OF PRIVATE EQUITY
“Five years ago, entrepreneurs ran family owned businesses
& looked to the next generation to take over the business. It
was very difficult for private equity players to invest as
entrepreneurs were reluctant to relinquish control of their
business. Now increasingly second generation family
members accept that ceding control of part of the business is
not a bad thing; PE investment provides additional capital &
brings additional business expertise & improved
governance.”
Richard Laing, Chief Executive,
CDC 2008 outlook
without PE funding, company…. Investments by stage
strategic direction
financial advice
Main contribution of PE
investor to business
operations
Recruitment
Marketing
Higher exports
Innovation
REASON FOR UNDERPERFORMANCE OF
PE
Low Standards of Corporate Governance
• Restriction on Licenses
• Bet on forecasts
• Loss making business
• Entering as a minority stakeholder
• Ambiguity in Government Policies
• Fragmented Sector – Cost efficiency
• Mobile telephony was still a Luxury among Indians
• Business model based on Cost-Volume-Pricing
Shareholder Value & Corp
Governance
• Think Big !!!
BT- Initial Suboptimal Strategy – Bell North
WP -Change in Plans – Pan India Presence
• Growth Plans !!!
BT - Management Approach to build business from scratch
WP - Time sensitive: Growth by Acquisition
• Restructuring the corporate structure
BT- Adhoc structure
WP – Buy back stakes to reduce to conflicts of interest
• Inclusion of Strategic Partners - SINGTEL
Exit
CONCLUSION
Privateequity funds are an excellent investment
options for venture capitals and other
organizations looking for long-term investment
in projects that will bring in good returns.