What exactly is private equity and why should you be interested in it? IIM Ahmedabad
alumnus Abhijit Nath gives you the lowdown and hopes that at the end of it, some of you
will be interested enough to want to get into the field as well.
What is Private Equity?
Private equity first emerged in the early 1980s, with Kohlberg, Kravis and Roberts
(KKR) opening the first, and still among the largest LBO (Leveraged Buy Out) firms.
The logic for LBO firms, at least initially, was this: Publicly traded companies are forced
to focus on extremely short-term (often quarterly or monthly) results, thus making
decisions which may not be in line with their long-term goals. Going 'private' or delisting
from the exchanges allows them to focus on these goals. Leveraging, that is, taking debt
to buyback these shares as well as spending on longer-term expansion, etc allowed
managers to run their companies the way they wanted to. Moreover, the LBO firms were
often run by investment bankers and consultants who contributed significant financial
and industry expertise. Over time, however, the deals also began to be 'hostile', that is, the
LBO managers perceived value in firms which they felt were mismanaged, so they would
buy them out, restructure them, and then sell them off once more.
The other side of private equity investment comes from the world of venture capital,
where small companies that need to grow but are cash-strapped and too small to list on
exchanges approach (or are approached by) VC firms to take a stake in the company, as
well as hand-hold them onto a growth path.
In India, private equity is reasonably young, dating back to the mid-1990s. The
environment heated up in the end of the \u201890s with the IT boom, with companies investing
(and getting their fingers burnt) with their investments. In recent years, there has been a
resurgence of these firms, with India\u2019s stock markets booming and sectors like the life
sciences, infrastructure and most recently, real estate being growth stories for the future.
Global firms such as Warburg Pincus, Blackstone and the Carlyle Group have a presence
in India while Indian players like ICICI Venture and ChrysCapital also have a large
Essentially, PE funds raise money from high net worth individuals, financial institutions,
etc. for a period of seven-ten years and then invest in opportunities as and when they
arise, either in early-stage, maturing or even public companies. The work involves of
course, valuing the companies that approach you and deciding how much of the company
your stake is actually worth, what the company\u2019s growth prospects are, etc. Structuring
the transactions for tax-efficiency and industry-specific reasons is also part of the job.
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