| The monetary policy has bad news for private equity (PE) funds. The Reserve Bank of India (RBI) today expressed concern over higher leveraging by PEs in international mergers and acquisition (M&A) deals and raised questions over the longer term sustainability of such investments worldwide. |
| The RBI’s caution comes in the wake of rising PE investments in the country even though the role of such investments in domestic M&As is minuscule, prompting analysts to say that the RBI has taken a futuristic view in view of the increased pace of foreign money inflows through PEs, venture capital funds and foreign institutional investors. |
| RBI said, “In view of the opaque nature of PE activity, high levels of leveraging has raised concerns about longer-term sustainability. Given the size of business accruing to private equity, they carry risks to overall macroeconomic stability and, in particular, to EMEs.” |
| PE investments in global M&As stand up to 25 per cent while its share in the Indian M&A scene is negligible to the extent of two per cent. In 2007, the overall PE deals in India amounted for $2.3 billion. |
| “Indian money markets are partly reflecting the result of the still-opaque thinking on capital inflows and the rupee. The government continues to encourage capital inflows, including overseas borrowing by Indian companies, but doesn’t appear desirous of further rupee appreciation, and is also concerned about higher sterilization cost,” Rajeev Malik of JPMorgan Chase Bank, Singapore, said in his report over the policy. |
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“Most of the PE capital flowing into India is growth capital as against leveraged buyouts in the matured markets where PE Funds take on high level of debts and starve the companies of excess cash to pay-off the interest / debts. Thereby improving their overall return of equity. This issue is not very relevant in the Indian context. Moreover, the unsecured / subordinated debt market is not so well developed in India, therefore limiting the debt capacity of companies,” Saif Dhorajiwala, vice president (investments), Avigo Capital Partners said. Source: Business Standard |