Equity capital that is not quoted on a public exchange is Private Equity. Private equity funds are investment companies that, as a rule, do not hold publicly-traded securities but seek the equity stakes in private companies. PE funds are high risk, high reward investment approaches. Thus, Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Private Equity, which is a sub-set of Venture Capital, is medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies.
Some examples of PE funds in India are Pragati Fund, Samridhi Fund and Avishkar Fund.
Out of them Pragati is a fund focused on investing in private businesses in India’s seven low-income states (LIS): Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh. These states are home to 421 million people classified by the Oxford Poverty and Human Development Index as ‘multi-dimensionally poor’. And poor infrastructure and governance make them less business-friendly.
PE funds provide long-term, committed share capital, to help unquoted companies grow and succeed, this is the biggest advantage. The smaller businessmen looking to start-up, expand, buy-into a business, buy-out a division of a parent company, turnaround or revitalise a company, PE could help to do the same.
Growth of PE Funds in India
Over the years India has been an attractive PE investment destination. PE investors have been enticed by India’s growing status as an economic powerhouse, its strong entrepreneurial spirit, highly skilled English speaking workforce. India’s large population also has been a driving force.
India’s PE industry has been developing steadily. The growth of Indian Economy and other macroeconomic factors and policies have complemented this growth. For example, India’s gross domestic product (GDP) grew from $460 billion in 2000 to $1.8 trillion in 2011, per capita gross national product (GNP) rose from $400 in 2000 to $1,400 in 2010.
Current Position of PE Funds in India:
Since 2005, PE firms in India have grown to over from a few firms to almost 300-500 firms today. Close to $40 billion has been raised by India-focused funds since 2005. However, the outstanding returns as expected have been been translated into reality. Many investors have generated single-digit net returns from the India portfolio. PE, typically a high-risk, high-returns asset class, is a low-returns game in India today. Investors are nervous and are approaching this segment very cautiously and selectively. While the efforts of the government to regulate this industry are laudable, they are also resulting in fear and confusion for investors and making the industry vulnerable.