Despite the current turmoil in the global credit Markets, private equity will continue to be an important source of capital, said a study conducted by the Boston Consulting Group (BCG) and the IESE Business School of the University of Navarra in Spain.
P Harshavardhan, partner and director at BCG pointed out that smaller private equity deals of about $10 million were getting out of fashion as compared with the majority deals that are taking place in the $100 to 500-million range.
“India, with her strong underlying fundamentals will continue to attract greater flows of capital from private equity Companies. With likely softening of equity Markets, in the coming years, private equity funds will have to build capabilities to deliver value through operational improvements and will not be able to count on multiple arbitrage that worked well in the past few years,” said Harshavardhan.
There were 1,750 private equity deals that took place between 2000 and 2006, added Harshavardhan.
On a risk-adjusted basis, private equity route does not outperform the public capital Markets; nevertheless, it remains an attractive asset for investors.
The sector’s focus is shifting from creating value through leverage to creating it through operational improvement and growth, making the sector less dependent on credit. Tighter credit and higher cost of debt (which is still only at levels reached in 2005, when private equity was already booming) will, therefore, affect the sector less than many others observers suggest. Saurabh Tripathi, partner and director at BCG is of the view that going forward, consolidation would be the biggest driver for the private equity market.
“In the coming years, we may see big and established private equity firms acquiring smaller firms, who are not doing so well, thereby expanding their presence in the country,” said Tripathi.
Tripathi added that India has much higher presence of private equity than other emerging markets. “Operational improvement lever is not fully explored as a differentiation in India,” he added.
Source: Financial Express