Private Equity Vs Debt

  • SumoMe

785979_red_buttons_2.jpgDespite a continuous effort to make the credit system increasingly flexible, more and more enterprises in the economy are now going in for Private Equity funding. The shift from the traditional bank loans to private equity flow marks a new trend in the economy.India is the second largest Private Equity market in the Asia Pacific region after Australia. Projections for this year by Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India, initially speculated a sharp increase in the Private Equity dealings in the year 2008. The year 2007 ended with around 300 such deals. With the situation in stock market looking grim, it is likely that the number of such deals grow more than estimated in this year.There are various reasons as to why Private Equity funding has picked up. Strong international inflow of PE is one. The PE companies, in turn, are looking at the high growth sectors like pharmaceutical, financial services, media among others. They provide not just the capital, but also strategic advices on various issues such as corporate governance, M&A, etc. Additionally, the enterprise can also capitalize on the PE firm’s global network.The PE investments in firms have helped the firms expand their capital base. Meanwhile, the credibility of the investment firm helps the company to get an easier access to the bank loans. The valuation of the company improves, providing for better pricing in IPOs. Also, the increasing interest rates have made this type of financing more attractive for a company.The PE flow in absolute terms is, however, still negligible compared to bank lending. It is unlikely that one will completely replace the other. As the capital requirements increase, the actual proportion of debt and PE in total investment will depend totally on the type of sector vying for financing.Garima Gupta

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