Analysis of options available for PE/VC and portfolio firms and possibility of regulation of PE/VC industry

Abstract

The private equity industry has expanded at a very rapid rate. While the financial crisis did dampen the private equity industry for some time, post crisis, there has been a flurry of activity in the private equity industry. In the wake of the booming private equity sector, there is a need to study the aspects of relationship between a private equity and its portfolio firm. The dynamics of the alliance between the private equity firm and the portfolio firm depend upon how effectively management decisions are taken. The possible issues which may arise due to disagreements between the two parties are sorted out primarily by negotiations. Our project is based upon the study of the options available for the private equity firm and the portfolio firm. These options are with regards to various issues of exit strategy, investment horizon and diversification plan. We have also looked into the possibility of an unequal contract between the two firms which is inclined in the favour of one of the parties. We have looked into the possible issues which may arise between the private equity firm and the portfolio firm and the control mechanism to resolve the issue. An interesting aspect of the pattern of investments by private equity firms has been the scope for investing in portfolios outside their core sector. We have attempted to address this concern of portfolio dilution. Our project also looks into the effect of regulation on the private equity industry. We have analyzed the need of regulation and the areas in which it is applicable. We have also suggested possible courses where regulation is applicable. Our analysis is primarily based upon the discussions we have had with people from PE firms, VC firms, portfolio firms, industry experts and academicians.