Private equities (PEs) are being globally recognised as a separate asset class, attracting a huge corpus of funds from investors like pension and insurance companies, trusts and organisations that are looking for investment avenues. With medium and long-term returns as their target, PE employs these funds in select companies for investment.

Hugely successful in Europe and the US, PE contributes heavily to Mergers and Acquisitions (M&A) globally. Though such investments in India are still in their nascent stage, private equity is evolving as the mainstream source of capital. Private equity firms invested almost USD 5 billion in 2006 in India, which is almost 10% of the PE in Asia.

In terms of total M & A value and volume, private equity in India has performed better than expectations, climbing from12th rank in 2006, to 7th position already in the first quarter of 2007

In 2006, private equity investments in India rose by 230% to USD 7.46 billion, as compared to USD 2.26 billion in 2005. The 1st quarter of 2007 has seen investments of USD 2.5 billion as against USD 1.27 last year during the same period.

PE investments in India have been restricted through FEMA which control and limit FDI in some sectors like telecom, aviation, real estate, media, banking and insurance,. Even the government’s latest move to limit foreign direct investment in real estate has had a cascading effect on private equity as a whole.

PE is faced with some resistance from Indian companies who are wary of sharing financial information, which ultimately restricts the choice for investments. Some of the medium sized set-ups are family controlled businesses and are reluctant to share information and accept advice from PE companies who are keen to play a constructive role in the operations of the firm.

Nevertheless, private equity is gaining ground in India as real estate, pharma, biotech, retail, IT and infrastructure are opening up to such investments, though the choice of investments is based solely on their return potential.

Private equity could play a more constructive and penetrative role with investments in India’s small and medium enterprises (SMEs), similar to the Alternative Investment Market of the London Stock Exchange. SMEs could draw on these resources to drive their expansion plans and reach out to international markets.

A visibly positive role played by PE investments in India so far has been in generating employment opportunities, BPOs have benefited tremendously as PEs and VC put their money in these ventures. PE can also drive a company into good governance, bringing in transparency and professionalism across industry.

Lately PE firms picked up stocks in small and average-sized firms, raising fears that their quick exit from these investments would leave companies high and dry. However, observers are of the view that such PE funds generally conduct withdrawals over a sufficient period of time to ensure stability within the company.

Recent PE investments in India include Chrys Capital’s USD 24 million in Mankind Pharma, and Canaan Partners’ and SVB Capital’s investment in iYogi with USD 3.10 million. General Atlantic, Goldman Sachs and Saif Partners picked up 5 % shares each of the NSE while Trinity Capital and ILFS have put their faith in DB Realty

What role do PE firms have in companies they have invested in? PE investments almost assume the role of partnerships, as they provide assistance to these ventures in executing their strategiesat the board level, raising funds through public issues, mergers and acquisitions.

As India’s economy prepares for the big leap forward, PE firms are eager to channelise their funds in Indian business, confident of steady and enduring gains on their investments.

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