After growing rapidly from around $1 billion in 2004, private equity flows into India grew to $7 billion in 2006 and will probably exceed $10 billion this year. In addition to its traditional functions of providing smart capital to fuel the entrepreneurship of non-traditional businessmen and boosting managerial efficiency, PE is slated to enter into new areas such as leveraged buy-outs, distressed assets and infrastructure. We could also witness some public offers from PE firms.
At present, there are over 100 PE firms seeking to deploy $20 billion in India. The PE industry has been able to attract talented professionals from major consulting firms, investment banks and industry in India and overseas. Some of the large deals have been KKR’s investment of $900 million in Flextronics, and the recent Carlyle investment of $600 million in HDFC.
Globally, PE has seen an unprecedented boom, drawing in increasing amounts of institutional investment and private wealth by delivering superior returns. There are several global PE firms with over $50 billion of invested capital and a new fund size of $10 billion or more is not uncommon. Beijing’s $3-billion investment in Blackstone has created a new landmark.
Sale of Chrysler to US PE fund Cerberus posits PE firms as a major force in the global market for corporate control. However, globally, PE investment is less than 4% of the total public market investments. In India, this figure is probably closer to 2%. There is still a lot of potential for growth of this alternative form of corporate ownership.
Thanks to its fast growth, the PE industry has attracted serious criticism in Europe and the US: it is alleged they take on excessive leverage, restructure managements, slash jobs, strip assets, fail to invest for the long term and still enjoy unfair tax advantages. PE supporters, on the other hand, contend that it creates more value as compared to public ownership.
The British PE and Venture Capital Association research has demonstrated that PE-backed companies have grown faster in sales and employment than others.
What has been the Indian experience?
PE has contributed to economic growth by both providing smart capital and improving capital efficiency. In addition, it has encouraged entrepreneurship by supporting new ventures and promoting new industries such as BPOs. It was Warburg Pincus, a major PE firm, which gave Sunil Mittal early stage capital for Bharti Airtel and supported Mr Mittal’s entrepreneurship, leadership and management skills to create one of the most successful companies in India. Of course in the process, Warburg Pincus delivered outstanding returns to its own investors.
Source : Economic Times