By Parikshit Mistry, Carnegie Mellon University
What is private equity (PE)?
The term “private equity” refers to equity capital that is not quoted on a public exchange. Private equity funds typically invest money capital raised from retail investors (such as high net-worth individuals) and institutional investors (such as pension funds and life-insurance companies), into enterprises that have the potential for growth and thus, the ability to generate a substantial return on investment.
The investment cycle
The first stage is the investment into the enterprise. This business could be either a private limited company, or a public company which the private equity fund wishes to improve by taking it private for a period of time. Sometimes, these buyouts are financed through debt and are known as LBOs (leveraged buyouts). Once it has made an investment in a firm, the PE fund will work with the firm to improve its financial results and prospects. When the fund feels that it has met its expected investment targets, it will implement an exit strategy, the common one being an IPO, with strategic buyouts and opportunistic exits being some of the other options available.
The Indian growth story
For the past five years, the annual growth rate of the Indian economy has been between 5 & 10%, and each of the three sectors of the economy (agriculture, industry and services) has enormous growth prospects. Agriculture, which employs 52% of the workforce, is set to receive increased government support in R&D, with segments such as livestock and organic farming being areas of interest. The large amount of skilled and unskilled labor is beneficial for growth of the automobile and pharmaceutical segments in the industrial sector, and the service sector, which comprises 63% of the GDP, is also expected to grow rapidly, with significant growth coming from transport, hotels and communication firms (over 10% per annum).
PE in India
With the first few deals in 1996 valued at ca. $20m in 1996, PE activity has skyrocketed in India ever since, with 339 deals worth over $17.1bn in 2007. Along with major national funds such as ICICI Ventures and IL&FS, international PE giants such as KKR, Blackstone and The Carlyle Group, have also been active in the nation.
Future growth prospects
While the diagram above shows segments that PE funds are currently attracted to, the following are some areas that have immense potential for growth, and thus, the ability to become magnets for PE deals:
- Education- A $40bn market with a 16% growth rate, this segment is sure to draw investors, particularly due to greater preference for private institutions and e-learning.
- Healthcare- With increasing FDI and government support, this segment is poised to grow, with enormous opportunities in medical tourism and equipment firms
- Renewable Energy- Large natural endowments, together with favorable government policies, make this segment lucrative; hydropower, due to its high untapped potential and biofuels, with new laws allowing blending of ethanol and gasoline, are two specific areas with great prospects
- Healthcare- With increasing FDI and government support, this segment is poised to grow, with enormous opportunities in medical tourism and equipment firms
