MEANING OF PRIVATE EQUITY (PE)

Private equity is the capital brought in by the Private Equity firms (simply called as ‘PE firms’) into the enterprise as part of equity capital. PE firms are the investment fund companies who take strategic stake in the enterprise once the enterprise is established as a successful cash generating unit. This is

the basic difference – the PE would come in post the Venture Capitalist (VC) - a typical example will be of a PE firm replacing a VC interested to exit out by repaying off its investment debt, and taking a position in the equity capital of the firm. PE firms are in a broader sense, the long term investors into the enterprise and act like ‘mentors’ to the management. 

Industry Overview 

Private Equity (PE) is the alternate form of investment, as compared to publicly traded equity markets, where the PE investor (or the PE firm) invests majorly into startups and emerging sectors through strategies like early funding, venture capital, growth capital, etc. The main characteristic is that these investments function on a higher risk to reward model, and in order to amplify the returns, the PE firms use a leveraged approach of using debt as the funding instrument. PE firms target a return based on IRR or the ‘multiple based’ approach. 

The PE industry has grown significantly in the past three decades, and over a period of time PE firms like Bain Capital, Blackstone have grown tremendously entering successfully into Asian markets too. There was a temporary setback in the PE industry during the dotcom bubble seen in 2000-2003, but has staged a comeback, stronger and more resilient. The growth in PE has also seen marked increase in regulations in both US and Europe. In US, the SEC regulates PE industry, and in addition has added FATCA (Foreign Account Tax Compliance Act) and the Alternative Investment Fund Managers Directive to have greater transparency in the workings of PE. 

The below table gives us an insight into the largest Private Equity-Backed Buyout Deals in 2016:

The concept of alternate investments has slowly gained a steady trajectory in India. An excerpt from The Economic Times dated Mar 11, 2017 on the PE industry in India - ‘The year 2016 turned out to be a mixed bag for India in term of private equity and venture capital investments. The volume and value of these investments in 2016 decreased by 25% and 39% respectively compared to the year before (2015). This decline was expected as the flurry of investments in 2015 was shouldered by a high volume of startup deals during the year. In 2016, the political and economic turmoil in Europe, including Brexit, rising oil prices and increased risk premium for technology/internet sector investments affected the sentiments of foreign investors.