How to make a correct investment decision is a million dollar question or may be more. Different class of investor communities have been using different kinds of investment methodologies to search good investment opportunities. Some use fundamental analysis. Some rely on technical charts. Some even follow the preaching of successful icons such as Warren Buffet. And, then there are a group of investors who keep a close watch on the companies on which Private Equity (PE) players are betting on. PE investors are known for investing in unlisted companies. However, they are now also ramping up their activities in the listed space.
What is rationale behind chasing the PE investments? Well, it is a known fact that PE funds look for good companies at attractive valuations. Not only that, they bring good business values to the table. First they bring much needed funds in to the company. Then, they facilitate raising more funds as they have good networks with other big investors such as Foreign Institutional Investors (FIIs). In addition to that, they also help in making business strategies as they are considered to be industry experts. All this helps the company in which they are investing, perform better in the future. Hence, following PE players appears to be a good idea.
However, there are many problems in the implementation of this philosophy. First, as an investor you come to know about PE investments only after it actually happens. Hence, by the time, you know, it may not be an attractive opportunity in terms of valuations. Second, you do not have any means to check all the nitty-gritty of the deal between the company and the PE investors. Just looking at the investment figures does not tell the whole story. The deal may be sweet for the PE investors. Those benefits may not be available to you in the secondary markets. Third, and the most important, the exit of PE investors. Again, you would know this after they exit. And, in the process, you may not be able to reap the benefits of higher valuations.
Besides, you would be a bigger loser in case PE players make a bad investment as they would exit before you even think of doing that. Hence, in case of profits, your gains are capped. And in case of losses, you would feel a bigger pinch.
True, there is no harm in tracking PE investments. However, investors would do well if they refrain from making their decisions solely on this basis.