Page 237 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes
SYNERGY ART FOUNDATION, which runs art galleries in Mumbai and Chennai and
plans to set up in Pune and Delhi too, had received 25 lakhs from the TDICI as convertible
loans which were converted into equity on march 31, 1994. Most of this money has been
used for the company's innovative art library scheme at least paintings to corporate
clients.
Questions

1. How has TDICI gained through its venture funds?
2. How do you think can TDICI gain further?

Source: www.indiape.com
16.5 Private Equity

Private equity refers to a type of investment aimed at gaining significant, or even complete,
control of a company in the hopes of earning a high return. As the name implies, private equity
funds invest in assets that either are not owned publicly or that are publicly owned but the
private equity buyer plans to take private. Though the money used to fund these investments
comes from private markets, private equity firms invest in both privately and publicly held
companies.

Private equity has become an increasingly mainstream asset for sophisticated investors. Private
equity entails investment in nonpublic companies at various stages of development and
encompasses venture, buyout and mezzanine investing. Investors typically invest in private
equity assets either through individual funds, usually limited partnerships with a specified
investment stage and geographic focus, or via a fund of funds, through which commitments are
made to multiple underlying funds. Some investors may also invest directly into unquoted
companies, often on a co-investment basis alongside individual funds. Secondary investment –
the acquisition of an interest in a private equity fund from the original investor before the end
of the fund’s fixed life—is also embraced within the broad definition of private equity. When
investing in private equity through funds or funds of funds, an investor makes an initial
commitment of capital that is then “called” or drawn down as the investment managers of the
underlying funds find investment opportunities. Capital is chiefly returned to the investor via
distributions on the sale or recapitalization of individual unquoted companies by the underlying
funds, although in some cases investors may also receive earnings-derived distributions.

Concept of Private Equity

Private equity is essentially a way to invest in some asset that isn’t publicly traded, or to invest
in a publicly traded asset with the intention of taking it private. Unlike stocks, mutual funds, and
bonds, private equity funds usually invest in more illiquid assets, i.e. companies. By purchasing
companies, the firms gain access to those companies’ assets and revenue sources, which can lead
to very high returns on investments. Another feature of these private equity transactions is their
extensive use of debt in the form of high-yield bonds. By using debt to finance acquisitions,
private equity firms can substantially increase their financial returns. The debt used in buyouts
has a relatively fixed cost, so if a private equity fund’s return on assets (ROA) is greater than this
cost, the fund’s return on equity (ROE) is higher than if it hadn’t borrowed money. The same
principle applies in reverse, however, making these leveraged buyouts potentially very risky;
if the acquired company’s ROA is lower than the cost of the debt used to buy it, then the private
equity fund’s ROE is less than if hadn’t used debt. The firm would lose money on the
investment and still have to pay back the loans, a situation similar to having negative equity in
the housing market.

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