Mike-Devlin on the world of private equity
For many entrepreneurs who have started a company the prospect of having to go out and raise outside equity capital seems daunting. In my experience, this is true no matter if the company has $1 million in revenue or $100 million in revenue. Entrepreneurs are passionate about their business and the good ones can tell you everything about the company, sector, micro/macro trends in their industry etc... but when it comes to capital raising, it is often a blind spot. Given that investing equity in companies is something I've been doing for quite awhile, I thought it might be useful to set up this site and answer any questions about the process, give some insights into how venture capitalists and other private equity investors think and how you can make this process less painful. Recently, I was interviewed at http://www.seomoz.org/articles/pharos-vc-interview.php about the world of venture capital. Take a look and let me know what questions or comments you may have.
posted by mike-devlin at 7:31 AM
2 Comments:
Hi all....
recently i read an article on private equity investments comparing India with other countries, written by Alok Aggarwal Chairman Evalueserve. Folowing is the abstract of the article:
PE Market: India vis-a-vis Other Economies
Apart from the US and Europe, India and China have emerged as favored destinations for private equity investments. According to Evalueserve, the global research and analytics firm, the investor community has already lined up USD 48 billion for investment in India by December 2010. The research and analytics firm also forecasts investments to the tune of USD 20 billion in the country in 2010 alone. This situation is in stark contrast to 1996, when Indian companies received only a total of USD 20 million.
Even from a demand-side perspective, the Indian economy is estimated to grow to approximately USD 5,040 billion in 2020 (in nominal terms), and hence should be able to absorb as much as USD 490 billion in investment between 2007 and 2020.
However, India still has a long way to go before it catches up with the other developed and emerging economies. In many respects, the maturity of PE investments in India today is similar to that in the US in the early 1970s. India is still a developing economy with a severely underdeveloped infrastructure, whereas the US is one of the wealthiest countries with a state-of-the-art infrastructure. Furthermore, there are broader risks associated with the Indian market—the possible depreciation of the Indian Rupee, high volatility in the stock market and inflation, and the possibility of the Indian government not liberalizing the economy any further.
According to Evalueserve’s research, in 2006, the US economy saw USD 191 billion in PE investments, whereas the UK economy received USD 42.3 billion. However, China and India could manage only USD 13 billion and USD 7.5 billion, respectively. Moreover, PE investment as a percentage of GDP in the Indian economy was only 0.8% compared with 1.4% and 1.8% in the US and the UK, respectively.
In the US and Europe, the typical PE investment threshold is considered to be USD 25 million. However, since wages in India are between one-third and one-sixth of that in the United States and most other costs (hardware, software, machinery, office furniture, and real estate in the large cities) are virtually the same, Evalueserve analysis indicates that the comparative benchmark for PE investment in India is $10 million.
The majority of investors in the US and Europe have a time horizon of 5–7 years, and they expect to provide an average net annual return of 13–15%, i.e., double the investment of their limited partners, in approximately 5 years. However, PE firms operating in India seem to have a time horizon of 3–5 years and their expectation of an average net annual return is between 25% and 27% (i.e., double the investment of their limited partners) in 3 years. This is due to risks associated with India as an emerging market and higher volatility in the Indian stock market.
Lastly, although both India and China are emerging economies, they are very different in many respects. A lot of progress in China has been possible due to the government, whereas in India, it is despite the government. For example, the communist government in China can easily plan projects in a very structured and systematic manner without worrying about the courts or public opinion, whereas most projects in India get delayed because of Indian courts and a strong public opinion.
In view of these factors, it is necessary for PE firms to consider investing in Indian companies after a conducting a through research of the overall market and the sectors they are targeting.
Private equity firms generally receive a return on their investments through one of three ways: an IPO, a sale or merger of the company they control, or a recapitalization
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