Page 238 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 16: Venture Capital

Factors affecting Private Equity Notes

The following are the key factors which affect the growth of private equity:
1. Raising Capital: The company may need a large inflow of capital for long-term productivity
investments such as research and development. Rather than waiting several quarters (or
years) to gather sufficient capital, the company may choose to sell part of its interests in
exchange for the ability to pursue development projects sooner. This may be especially
true of highly time-sensitive industries such as technology (e.g. software,
telecommunications, and Internet services), where a few quarters may make a critical
difference in a company’s ability to gain (or maintain) a market advantage.
2. Increasing Regulation of Public Markets: Second, given the increasing regulation and
scrutiny in the public markets over the last several years, some companies may wish to
avoid having their destinies controlled—or at least heavily influenced—by public
shareholders. In a public company, shareholders have the right to cast votes with regard
to any number of issues critical to the company. In a private equity transaction, such rights
typically do not exist. Accordingly, a company can raise capital without relinquishing
operating control to external shareholders. Nevertheless, a private equity firm does retain
some control, such as the ability to influence the composition of management teams.
Often, a private equity firm may take an interest in a company on the condition that the
company install new management—which ideally will improve operating results and
drive profits.
3. Effect on Public Markets: For stock market investors, the real question is how the private
equity market has affected public markets and what its likely effects will be in the future.
Many analysts argue that the increase in private equity deals has actually benefited some
aspects of the stock market; the reason is that, with so many companies going private, it’s
become harder for public investors to gain exposure to industries where private equity
has been especially influential. Small- to mid-size firms in the energy and finance industries
are prime examples. With the increase in private equity deals, the availability of publicly
traded shares of such companies has decreased. This decrease in supply has caused the
remaining shares to increase in price; as there are fewer available, each becomes more
valuable.
4. Rising Stock Prices: Private equity can boost a company’s stock price if people think a
buyout is likely. Companies that are perceived as likely targets of private equity buyouts
have seen their stock prices rise in anticipation of the transaction. Given recent trends in
the private equity industry, investors often feel safe in assuming that private equity firms
will pay a hefty premium over a company’s market value.

Private Equity in India

The Indian economy has been enjoying a period of sustained growth at around 8 per cent a year.
The latest boom has attracted the attention of private equity houses who have been participating
in an unprecedented number of investment deals. In sharp contrast to the time private equity
funds invested in India from a base overseas (for example Singapore), many private equity
firms have now established a presence in the country, spurred on by a bullish market and some
spectacular and well documented exits. This reflects the importance of understanding local
markets and working closely with promoters (families or controlling shareholders), as well as
the benefits of local decision making.
The Indian private equity market is different from that of Europe or the United States in that
small family-owned and family-managed businesses account for a high proportion of the market

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