Understanding Private equity investments, the new age investment tool catching pace in India

Private equity, in simple terms, means investments by a private investor in equity securities in operating companies that are not publicly listed on the stock exchange. The premise could be to provide working capital to the unlisted targeted company and nurture expansion, new product development or even restructuring of management or ownership.

One of the examples could be Sequoia Capital, the venture capital arm of Citigroup, and 3i, invested to the tune of 223 million dollars in Ind Barath Power. 


Private equity is broadly used for to mean both early and late stage investments. There could be 5 main styles of Private equity investments. Each of these categories of investor has its own set of goals, preferences and investment strategies:

      

•       Venture capital funding where investment is made with high stakes in early stages and fast growing investments. A novel idea or a breakthrough technology investment could be some of the likely beneficiaries of angel/ venture investors.
•       Growth capital funding is more often than not investing with minority stakes in large companies who need capital to expand their business, maybe even enter a new market.
•       Buyouts, where large stakes are bought in more established companies, normally listed space and the investor normally has a view to take it private.
•       Mezzanine capital: Investments are in the form of subordinate debt or preferred equity securities, the most junior form of the capital structure and has seniority to common equity capital. In India, an example of this investment form could be ICICI ventures India Advantage Fund VII which raises capital from investors for deploying them to targeted companies for mezzanine funding.
•       Secondary investments: This is an investment style when investments are made in an existing private equity asset, involving sale by an existing private player, exiting the stakes in a privately held company.
  Prominent secondary sale in the last couple of years has been the one between ChrysCapital and ICICI Prudential Life Insurance Co. Ltd, for offloading one third of its stake worth nearly 60 million dollars (Rs 300 crores) in Shriram Transport Finance in 2009.

Let’s look at what could be the possible reasons for a company to ask for private equity funding:

• New age/ young companies may find it difficult to raise money with the traditional sources, the gap being filled by venture capitalists.
• Bank debt is normally is normally backed by secured assets, however private equity is a way of making the investor your partner for medium to long term, thereby improving the companies’ balance sheet.
• For companies which are distressed and need funds to grow, private equity could help infuse fresh blood and an opportunity to come back in the reckoning. Private equity investments not only provide fresh cash flows, but also bring with them intellectual capital that could contribute positively in improving the operational performance of the company.
• In specific industries where Research & development capabilities are the edge over long term, Investments made could be earmarked and used for research and development and even developing new technologies.
•  In very competitive industries, investments received in the form of private equity participation can also be used to make acquisitions in their related field to increase competitive edge.

As visible, the above could be various reasons why private equity investments could be welcome for companies in various stages of lifecycle. However, at the end of the day financial wisdom must prevail. Surely, there has to be merit in such investments for investors in the private equity fund, the true stakeholders.

Often the difference between a successful investor and a not-so-successful one is not one with better abilities or ideas, but the courage that one has to bet on ones ideas, to take a calculated risk-and to act!