Private Equity Demystified

What exactly is private equity and why there is so much buzz around it. Private equity emerged in the 1980s with the KKR group. These PE firms provided cash for companies to go private. Going private helped the companies to run it the way they wanted. The PE firms were run run by investment bankers who brought considerable expertise to these companies.

There is also another concept called Ventue Capital (VC). Here smaller companies which are cash trapped and are too small to list in the exchanges are helped by VC firms by taking a stake in the comapny and help them towards a growth path. Thus providing them both with the cash and the technical expertise

In India private equity is relatively young. It started with the IT boom towards the end of 90s. In recent years a number of these companies have come up due to stock market boom and the growing Indian consumer market. Global firms such as Blackstone and the Carlyle Group have a presence in India and are scaling up their operations.

Indian players like ICICI Venture are also growing rapidly in this market space. The next big question is how do these firms make money?

Essentially, PE funds raise money from high net worth individuals and financial institutions, for a period of 7-10 years and then invest in opportunities as and when they arise. The firms valuate companies and take a stake depending on how much is the company actually worth, how the company will grow etc.

Post stake taking, day-to-day monitoring and growth plans are monitored by the fund, with a senior director taking a seat on the company's board. Since the target is also to exit the investment in a few years and return money to investors, the deal team also constantly monitor the capital markets for suitable times to do an Initial Public Offering (IPO) or find a strategic investor to sell to