Wednesday, August 20, 2008

The PE bland dish

In the spiceland of India, nobody likes a bland dish!
But that's what PE funds have lately become. I revisit their fundamentals. Private equity investing may broadly be defined as "investing in securities through a negotiated process". The majority of private equity investments are in unquoted companies. Private equity investment is typically a transformational, value-added, active investment strategy. It calls for a specialized skill set which is a key due diligence area for investors' assessment of a manager. The processes of buyout and venture investing call for different application of these skills as they focus on different stages of the life cycle of a company.

This is the world view of PE and the reason why savvy investors buy into private equity funds, classifying them as a premium asset class and crediting its managers with superstar status.

But in India, the superstars hardly sizzled. Strategic input? My foot! They whimper and whine and take refuge in quoted equity. They settle for minority stakes, wield no great influence in the board and look no different from passive public market investors. So do their dull and dreary strategies and they do what an average investor does – see how they follow Rupee cost averaging.

I think the investors in these funds will fare far better buying Index funds. They can at least save all that management fee and the carried bonus they pay for bobbing up and down with the market sentiment.

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