Tuesday, April 24, 2012

Current situation of PE funds in India

Rewind 5 to 7 years back when everything was hunky dory in the world of finance. At that time, the Indian stock markets were marching ahead in full optimism. That was also the time when private equity (PE) as an asset class gained a lot of ground. Typically, PE funds in Asia take equity stakes in unlisted companies. When later the companies go public, they tend to gain handsome returns. In other words, it's a high-risk high-return game. Unfortunately, so far, PE funds in India haven't been able to taste the kind of success they set out for. Why? As you know, Indian stock markets have slowed down over the last few years. The IPO markets are running dry. At the same time, many owners are reluctant to issue public shares.

But there is a more fundamental reason for the failure of PE funds. During the heydays of 2005 and 2007, they were carried away by greed. They made investments at expensive valuations. Even when they had opportunity to sell off when the markets were soaring, they did not, hoping for even better valuations. This is a very important lesson for retail investors. Greed has the power to make even highly qualified professionals behave in irrational ways. It is best to stick to the fundamentals of value investing and not get carried away by market swings.

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