subject: The Key to Private Equity Investment in Banking Firms [print this page] The Key to Private Equity Investment in Banking Firms
Private equity investment is nothing new. "Sleeping partners" in small businesses have been common since ages. However, with the modern day complexities, sizes and challenges, this has acquired new forms and names. For example, venture capital is funds invested in a relatively new business. Growth capital is offered to mature companies needing money for expansion or operational funds. Leveraged buyout is pooling investments to help or to help takeover a company in distress.
Banker's Role
India is attractive to both domestic and foreign private equity players. The safe economy, sanctity of contracts and a reliable legal system attract large funds to India. Investment banking firms specialise in locating opportunities for private equity. They pool the funds and manage the capital outlay. It is something similar to a stockbroker arranging trading of shares on a stock exchange. The only difference here it is not "stock" in the usual sense and the arrangement is arrived at, privately between the parties. The banker "brokers" private equity investment between the parties.
Rules of the Game
Some large finance firms build funds dedicated private equity. Smaller investments are pooled and are laid out privately. Here the investors do not have much active role; they only know the risks and expect higher than market returns. The regulations concerning private equity are quite flexible. However, it is advisable to checkout whether special approvals are necessary for a particular sector. Banking sector is a good example of certain regulations. The private equity investment sponsor may or may not have, or may not desire decision-making control.
Potential Returns
By their nature, these deals are one-to-one in nature; as such, the returns are negotiated by the funded company, the investor and the investment banking firms. Profits vary from case to case. Risks are higher; as a corollary, the profits are much higher than equities.
