India-First-Global-Insights-Analysis -Sharing-PlatformIndia-First-Global-Insights-Analysis -Sharing-Platform

Private equity industry in India & downsizing?

, January 7, 2014, 0 Comments

Private Equity Industry in India - MarketExpressThe  private  equity  industry  in India saw a massive boom like other financial sectors in the boom years of 2005-2008. While major investment banking sectors such as research, M&A etc. saw a huge recession in 2009, the private equity industry came out relatively unscathed due to the long term locked nature of funding. Private equity funds generally raise funds for around 5 years and only have to return money after that.

Other sectors are dependent on ongoing business for their revenues and had to downsize in a big way to align their cost base with their revenue base. However, the PE industry is finally facing its day of reckoning with lot of PE funds having to close shop or reduce drastically as funds dry up. Lot of PE funds are “underwater” as they have not made any profits which means that they can’t make any profits. PE work on the “2-20″ model, which means that they make 2% of their investment corpus as fees plus 20% of any profits.

The 20% has been a mirage, as last 5 years have been extremely bad of the economy and these funds have been surviving on the 2%. But now most of the fund tenures are getting over and no new funds are coming in, hence there is nothing left to pay the employees who form most of the cost structure of the PE funds.

Most Tier 2 funds are letting go off tons of top and middle ranked employees due to a dearth of revenues. Note PE funds have also been plagued by corruption and mis-governance in their investee companies. Indian promoters are notorious for their sharp practices and siphoning of company money for personal gain is quite common.

PE funds have been involved in a lot of litigation but given India’s slow judicial system, they have not been able to get much from the corrupt promoters. During the boom years, the PE investors did not do enough due diligence and they are paying a high price for that. India desperately needs capital to fund its infrastructure and economy. The PE money is an important source of capital for new ventures and companies. But seems like other sectors of the economy, PE will only make a comeback after a couple of more years.

In 2013, at least two dozen PE fund managers have been rendered redundant, either after a downsizing or a fund shutting down its India operations.

Unable to generate profitable returns and struggling to raise new money, funds such as 3i Capital, DE Shaw, Aureos Capital, Actis, Standard Chartered PE and Kubera Partners are either shutting shop or are downsizing their teams here. Slowing deal cycles, lack of investment opportunities and poor flow of exits from investments made over five years ago are now also taking toll on talent in the PE industry.

The number of executives working in the PE industry has shrunk by 15% to around 1,058 in 2013, according to data from Vito India, a leading domestic executive search firm.