The global financial crisis has resulted in a heightened interest
on the part of the policy makers to understand the impact of both
traditional financial institutions, like banks and insurance companies, and
alternative investment assets, like private equity and venture capital, on the
global economy. However, private equity is an asset that has received
considerable attention in the recent years. This
is because of the impact of Basel II Capital Framework in the early part of
this century. However, the real boost of equity capital is mostly due to its
perceived exceptional returns and an increasingly important business
landscape. This shows that capital requirement for private equity investments
is an economically important issue. Private equity, by nature, has
multiple perceptions and misconceptions. But the standard feature of private
equity is investment through firms, which are generally private partnerships
or closely-held corporations. Private equities are mostly preferred
convertible stocks, which have high risk with high expectation of returns. It has grown
to a mammoth size in the world, both in terms of deal volume and deal
value. To put it in other way, private equity industry has moved from the fringe
to the center of capitalist action. This is, however, flourishing in the
Indian economy, both in terms of deal volume and deal value. Figure 1 presents
the private equity deal (in terms of volume and value) in India over the last
six years. It shows that total private equity investment in India went up
by more than 185% from $675 mn in 2009 to $1,943 mn in the first quarter
of 2010. It is predicted that the trend will be more thriving in the next 5-10
years. This is particularly due to its booming business environment and the
general awareness of private equity in India.
The actual handiness of private equity is difficult to measure
accurately, mostly due to the peculiar features of the Indian economy. But with the
existing available information, the growth of private equity in India depends on
multiple factors, which can be grouped under two heads: pull and push factors.
It is a well-established fact that price always matters when you are in a
competitive business environment. The recent growth of private equity in India
is mostly owing to its price effect. The reliability of its claims and promise
of greater value addition are the most attracting factors. Moreover, there is
always a ripple effect from developed markets to emerging markets like
India, China and Japan. When the emerging markets are truly rationalized,
comparable to public markets and developed private equity markets, then
there is always a positive boost. That is what happened in the Indian economy in
the recent era in terms of the revival of private equity.
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