What is Private Equity and PE Funds?

1. Private Equity is capital not listed on a public exchange. Private Equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies. Institutional and retail investors provide the capital for private equity and the capital can be utilized to fund new technology, make new acquisitions, expand working capital.

2. Private Equity Funds invest in mature businesses, they are not early stage investors and do not invest in the stock markets either. The major foreign PE funds investing in India are registered as foreign portfolio investors.Indian PE funds are registered as category II Alternative Investment Funds. They do not invest directly in the market but can invest in a company before an IPO.

3. How Private Equity Investments Create Value?

Private Equity firms perform two critical functions:

a) deal origination/ transaction execution

b) portfolio oversight

Deal origination involves creating, maintaining and developing relationships merger and acquisitions (M&A) intermediaries, investment banks and similar transaction professionals to secure both high-quantity and high-quality deal flow. Deal flow refers to prospective acquisition candidates referred to private equity professionals for investment review. Some firm hire internal staff to proactively identify and reach out to company owners to generate transaction leads. In a competitive M&A landscape, sourcing proprietary deals can hep ensure that the funds raised are successfully deployed and invested.

4. In 2017, funds operating in India set new records, with investments in excess of $26 billion and exits from investments at $16 billion. The first half of 2018 saw a slight slowing of investment run rate but the exits topped all records, with the aid of Flipkart - Walmart deal, to touch $26 billion. Even without Flipkart, 2018 has seen $11 billion worth of PE exits already.

5. By one estimate, more than 100 funds, old and new, are trying to raise an estimated $15 billion India- centric PE funds right now. Many are inspired by China model and how the country has bunch of independent home grown PE funds and home grown investors.

6. Terms used in private equity:-

a) Limited Partner - Investor who puts money in a fund

b) General Partner - The entity that sets up a fund and manages it

c) Operating Partner - The one who manage the assets

d) Carry or Carried Interest - Share of profit on an investment paid to the manager, in excess of his contribution to the fund

e) Dry Powder - Amount not invested in a fund and still available for investing

f) Deal - Investing fund's money into a company's shares or other instruments

g) Exit - When a fund sells its investment in a company, usually after holding it for 5-7 years or more

h) Hurdle Rate - The return that funds should generate for limited partners so that general partners or fund managers can take home their incentive in the form of the carried interest. The hurdle rate is often set between 8% and 13%

7. Major Private Equity Players in India

a) Foreign - TPG, KKR, Blackstone, Carlyle, Apollo, Warburg Pincus, Bain

b) Indian Startups - Multiples, Everstone, Kedaara, True North

c) Sponsored PEs - Aditya Birla PE, Tata Capital PE, Motilal Oswal PE, Kotak PE, Mahindra Partners

8. Top 5 Exits of 2018

a) Target - Flipkart, Exits - GIC, Kalaari Capital, Tiger Global, IDG Ventures India, Accel India, Premji Invest, SoftBank Corp, Sofina, Naspers, others, Value - $16,000 mn Route - Strategic Sale

b) Target - Intelenet Global Services, Exits - Blackstone, Value - $1000 mn, Route - Strategic Sale

c) Target - Global Logic, Exits - Apax Partners, Value - $960 mn, Route - Secondary Sale

d) Target - Indus Towers, Exits - Providence, Value - $451 mn, Route - Strategic Sale

e) Target - Flipkart, Exits - Tiger Global, IDG Ventures, Accel India, Iconiq Capital, DST Global, Value - $350 mn, Route - Buy Back

9. Top 5 Investments of 2018

a) Company - Global Logic, Funds - GIC Pvt Ltd, Azim Premji Foundation, PI Opportunities, KKR, Carmignac, Gestion SA, OMERS Administration, Value - $1743 mn 

b) Company - Paytm E-Commerce, Funds - Alibaba Group Holding Ltd, SoftBank Vision Fund LP, Value - $350 mn

c) Company - Helathium Medtech, Funds - Apax Partners India Advisers Pvt Ltd, Value - $350 mn

d) Company - Future Retail, Fund - Premji Invest, Value - $254 mn

e) Company - RattanIndia Finance, Funds - Lone Star Global Acquisitions Ltd, Value - $199 mn 

10. There is now growing awareness among Indian business families about new ways of investing their money. While the larger ones like Aditya Birla or Piramal end up starting up their own PE initiatives, there are other who manages their funds through family offices and these have started putting their faith in private equity funds. Last year, India registered PE funds, which are category II Alternative Investment Funds, were allowed to make pre-IPO investments in companies.

Source :- Investopedia, The Economic Times

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