The emergence of India as a top destination for private equity investment is a development to be celebrated. According to data compiled by an Asian venture capital journal, India overtook both China and Japan, attracting in excess of $1.2 billion in private equity deals in January alone. Across the world, private equity has boomed as ever larger investment funds seek opportunities for big returns without having to play passive roles as investors. Now that India has booming businesses, many of them still totally in the unlisted domain, it is natural for some of that money to come here. Also, India finally has businesses of a large enough size to attract such interest. Private equity valuations are always much harder to arrive at, but the world?s big private equity players know what they are doing, even when they seem to pay what seem like very high premia for otherwise unfancied shares. Very often, publicly listed companies are undervalued only because stock market participants at large?even with institutional investors around? are unable to discern a business?s true competitive strength and thus potential. In fact, private equity firms have earned their spurs by identifying such mismatches in valuation and closing in on bargain deals based on enhanced information. When they do go for publicly listed companies, their objective often is to take them private again, see them get their acts together, and then re-list them at a bumper profit.
Indian firms that seek capital as much as expertise infusion are happy to be wooed by such players that bring so much more to the table. Corporate discipline of global standards, together with a stricter system of accountability, are especially valuable to family-run companies that, while wary of going public, are keen to adopt global best practices. A recent study by Capital Economics, a UK consultancy, on the role of private equity in the UK market in 2006, found that private equity broadens both the investment ability as well as competitive edge of such firms. There are, of course, pitfalls when a headlong rush happens. Too much money chasing too few companies can lead to gross overvaluations. Plus, private equity firms have been accused in the West of ruthless cost cutting and asset stripping to get back their money?s worth. Yet, the benefits outweigh these drawbacks.
