Private equity firms invested $3.3 billion across 97 deals in India during the quarter ended March 2008. During this same period, the market cap fell by Rs. 19.3 lakh, almost 27%, leaving shocked investors reeling under the economic turmoil.

While the markets may not have truly picked themselves up from the slump, the Indian growth story remains a widely believed one, especially with private equity firms still investing heavily.

The amount invested during the quarter was higher than that during the same period last year (which witnessed 101 deals totalling $2.7 billion) but lower compared to the immediate previous quarter (which witnessed 131 deals totalling $5 billion).

Private equity, a word stirring images of money, power, opportunity, mystique, control, and an unfathomable functioning that only the experts seem to know. These financial deals are made in such secrecy that if not for the buzz, one would almost believe that this is some kind of a secret society or conspiracy theory. PE, now-a-days, has made an entry into Indian markets in a significant manner and is expected to grow further.

Their discretion and success is proven by the fact that in recent years they have rocketed into the top five sources of funds in the world.

Like sovereign wealth funds, insurance funds or pension funds, private equity funds are now amongst the largest investment and asset managers in the globe. Having become popular since the late 90’s and making strong forays into India since 2000, this investment vehicle has transformed many companies and investors from rich to richer.

Why PE?

Private equity funds offer people a chance to join an exclusive club of investors, whose hands-on functioning increase their chances of success multiple fold. PE firms launch theme-based funds offering investors a chance to invest in a sector of their choice as well as look through the profile of the companies they are planning to invest in. With management support, and the expertise that these firms provide to the companies they have invested in, ensures that their money is not just multiplying itself but has a dependent catalyst in them bringing in the returns.

Private equity firms invested a record $14,230 million over 387 deals in India during 2007, excluding the real estate investments made.

For PE investments, the pre-IPO market seems to have been the stellar area, where investments made in 2007, and marked-to-market till the end of May, have seen the deals generate a 128.30% return, says a study conducted by New Delhi-based SMC Investment Solutions & Services.

However, the pre-IPO segment remains the smallest of avenues preferred by PE players, accounting for around $500 million investments in 2007. It is the IPO market, which saw maximum investments in 2007 – pegged at around $8.31 billion. And this segment saw average returns being around 22.14%, and around 43% of the 106 deals have clogged positive returns, says the SMC Investments report. Here, Powergrid and Mundra Port remain the strong performances and investments in real estate majors. Purvankara and Omaxe have pulled the returns down.

“Thanks to several mega deals in the infrastructure and financial services sectors, the amount invested during 2007 was almost twice that during the previous year. Despite the turmoil in global financial markets, PE investments during Q1 ’08 registered a growth over the corresponding period in 2007 thanks to a spurt in deals in the late stage segment, which accounted for 60% of the amount invested,” noted Arun Natarajan, founder and CEO of Venture Intelligence.

The largest investment reported during 2007 was the $1 billion raised by Bharti Infratel, the telecom tower arm of telecom services firm Bharti Airtel, from international investors, including Temasek Holdings, the Investment Corporation of Dubai, Goldman Sachs, Macquarie, AIF Capital, Citigroup, and India Equity Partners.

Watch points

PE, however, does happen to have a few drawbacks, with the biggest concern being liquidity. Though, if you do have enough money to invest without foreseeable cash flow concerns, then this is a very lucrative and good investment opportunity to look at. Through the boom years of 2005 to early 2007, private equity thrived, with record deal volume and readily available financing.

Also, it is important to be in alignment with the PE fund’s investment philosophy. With the PE scene building, there are many ordinary funds peddling mediocre wares and have faltered in a rush to make money, says a fund manager. This can be seen from the private investment in public equity or PIPE deals. This route was the worst performer in 2007. It saw average returns of around 8.34%. In the PIPE route, funds can chose to participate in the qualified investor’s route and also through the secondary market.

Here, “About 58% of the PIPE deals of 2007 are in a negative territory, owing to high entry valuations and volatile capital market conditions,” says the report. The manufacturing sector PIPE investments were the worst hit, as 14 of the 17 deals registered significant losses.

Force ahead

Be that as it may, the PE force is here to stay. It is not just the returns in the market, but the management expertise that they lend to companies makes doubly sure that the returns are handsome. Unlike normal funds, PE funds are active participants in the management’s decisions and have teams that add value.

Some of the most interesting points that came out from survey reports carried out by venture intelligence reveal some heartening facts for investors as well as receivers of private equity funding.

PE-backed companies grew at a significantly higher rate compared to non private equity-backed companies, as well as market indices like the Nifty and CNX Mid-cap. Wages too at private equity-backed companies grew at a significantly higher rate compared to their peers who are not PE-backed. About 96% of the top executives at private equity-backed companies believe that without private equity/venture capital financing, their companies would not have existed or would have developed slower.

Over the five year period considered, on average, PE-backed companies grew at 22.9%, a significantly higher rate compared to non private equity-backed companies (10%), Nifty (15.8%), and Nifty Midcap (13%).

The largest investment reported during Q1 ’08 was the $395 million raised by Sophia Power Company, a part of the Indiabulls Group, from Lakshmi Mittal-promoted LNM India Ventures and Farallon Capital.

Telecom continued to attract investor interest with KKR and Morgan Stanley investing significant capital into outsourced tower infrastructure firms like Bharti Infratel and TowerVision respectively. Other companies that raised $100 million plus rounds during the period included Cairn India, Ballarpur Paper Holdings, and travel technology firm InterGlobe Technology Quotient, and hospital firm Narayana Hrudayalaya.

A brief study into private equity, and a look at the functioning and success of these firms and funds, should be more then enough incentive for future investors to realise that this is a very lucrative investment tool. In the given times especially, being in an investment strategy that basically targets long-term growth and concentrates more on high yielding investments might be a relatively better place to park your money. While this option may seem a deterrent due to its secretive and unregulated nature, having good lawyers and sound advisors to confer with should pretty much relieve you of such fears. Private equity is more than an emerging investment tool and seems to be the way of the future, and if all goes well it is a complete win-win situation.