Tuesday, June 10, 2008

invoking Caveat Emptor

Guess Indian firms lately have been waking up to global connections of Private Equity.

Noida-based Phoenix Lamps Ltd, in which UK-based Actis bought a controlling stake last year, is cashing in on a slew of global tie-ups with international lighting firms, aggressive forays into international markets including Europe and West Asia, and rapid ramping up of capacity.

Aurangabad-based Endurance Technologies, in which Standard Chartered Private Equity Fund picked up stake a couple of years ago has been on a roll ever since, acquiring three European firms and opening a Detroit office.

Gokaldas Exports, India’s largest garment exporter, decided to sell out to Blackstone Group for $165 million in August last year to leverage Blackstone’s financial muscle and contacts in the key US market.

Shaken but not stirred by impossibility of leveraged finance, the private equity barons have been looking to move on. Dismayed and disillusioned western investors will no longer play ball. In the leveraged loan markets, assets have been marked down by a fifth, so 80 cents in the dollar is the new par. Thus the financial alchemists have turned to the huge pools of money available in the Middle East and Asia.
The vanity of the PE model attributed to its strategic (besides financial) prowess has been significantly exposed after the recent liquidity crisis in the Wall Street – where PE firms and its I-bankers abused the inept regulatory regime and lax credit conditions to erect dubious financial structures. Nobody bothered about the obscene management fee charged by the LBO architects that maintained that a superior financial structure is worth it all. Time to get back to the original PE model – no debt, no leverage; just plain capital invested in a business that screams `opportunity’.

Hope Indian firms don’t call the PE bluff way too soon like their cousins in the developed world… I invoke Caveat Emptor ;)

No comments: