| A recent report indicates that the share of private equity (PE) investments in listed companies in India, which accounted for as much as a third of all investments in 2005, fell to 22 per cent in 2006. Some of the companies from which PE funds have exited partially or fully in recent times include Punjab Tractors, Simplex Infrastructures, IVRCL and Gammon India. A similar trend of PE exits from publicly-listed companies in the US has also been seen, though the reasons may be different. |
| In India, this development comes at a time when private equity is gaining currency. With an estimated 100 private equity funds swarming around for deals, India is now one of the fastest- growing private equity markets in the region. And although the stock markets have scaled record highs (despite the current volatility), the preference by private equity for listed companies seems to be changing. How is this to be explained? |
| One of the main reasons seems to be the market itself. Many PE fund managers say that, among the emerging economies, India is where returns have been the highest. And, with many of these firms having held on to their current investment portfolios for the last three to five years, they deem this a good time to book profits. Second, with the India growth story continuing to be on a high, many of the existing PE firms are looking at fresh rounds of investments. To do that effectively, it is important for them to show real performance and returns, not just paper profits. |
| But going beyond these somewhat obvious trends, analysts argue that there are other factors that have been dampeners for private equity. For example, the average deal size in India is still small, barring a few exceptions. That, in turn, will have an impact on the PE appetite for longer holdings and the scale of returns. Further, many Indian businesses are still sceptical of PE funds in terms of the advantages that they can bring to the table. Therefore, while many of them continue to finance expansion through debt or new public issues of stock, the ones that have partnered PE funds are not willing to give them more than a relatively small stake. |
| Some of the PE deals have also come under government scrutiny. Most recently, the Punjab government has ordered an inquiry into the disinvestment in Punjab Tractors, where CDC (now Actis) acquired a stake in 2003 and last week, along with the Burmans of the Dabur group, which bought into the company, sold their stake to Mahindra & Mahindra. Internationally, the issues are quite different, and relate to the implementation of the Sarbanes-Oxley law and tighter corporate governance norms, following which some have argued that many PE funds in the US market have chosen to exit listed firms. That, again, could partly be due to governments and regulatory agencies choosing to focus on the source of funds in private equity and others, like hedge funds. Clearly, even as PE funds are riding a high, the name of the game is changing. |
Source : Business Standard