Private equity in emerging markets

Abstract

Emerging markets are the 1st and 2nd most attractive FDI destinations for investors globally. India has moved up the pecking order and has joined China to attain unprecedented levels of investor confidence as can be seen from the shift over the last three years in the AT Kearney FDI confidence survey1. Rank 2005 2004 2003 1 China China China 2 India United States United States 3 United States India Mexico 4 United Kingdom United Kingdom Poland 5 Poland Germany Germany 6 Russia France India 7 Brazil Australia United Kingdom 8 Australia Hongkong Russia 9 Germany Italy Brazil 10 Hong kong Japan Spain While China has held the top spot since 2002, India’s entry into the top three is a recent phenomenon. What is more interesting to note also is the fact that India and China together hold the top spots in almost all major industries and sectors. The report also concludes that India appears to be at the cusp of an FDI take off and expects the long term attractiveness of India to increase in the coming years. Private Equity and Venture Capital inflows, although they are counted as FII inflow into the country, in terms of dynamics and purpose are in a sense more akin to FDI inflow in the country as these inflows are more long term in nature and are primarily for the purpose of long term investment in Indian enterprises. Hence we believe that overseas VC and PE investment in India is set to take off into a higher level with significant inflows and investments in the coming years. In this context it would be an useful exercise to gain a greater understanding of the dynamics and intricacies of this industry and appreciate its importance to one of the world’s leading emerging economies – India. Organization of the report We commence our study by taking a brief look at the history of the Private equity and Venture capital industry world wide in Part 1. We also provide a definition for the purpose of this study. In the subsequent section, we look at the global Venture Capital industry and provide a glimpse of the key countries and geographies where a lot of the action is concentrated. In Part 3, we study a typical investment cycle and the stages through which Private Equity transactions are consummated. In Part 4 of the study we take a close look at the Indian Venture capital industry and provide an understanding of the direction and growth in investments in the last few years. In the final section we take a closer look at a select few transactions in the Indian context and relate them to the theoretical background of Part 3.