One would think that in a vast country like India, one could possibly never run out of investment options. But private equity (PE) firms in India just did. As per a Mint report, at least US$ 17 bn of PE money is 'waiting' to be deployed in India. And why is it waiting? There just aren't enough sound investment options!
Private equity firms are nothing but investment funds who invest in unlisted companies. Among other things, there are a few big factors that differentiate PE firms from investors who invest in listed companies. PE firms are forced to think of themselves as business partners of the promoters. Due to the lack of liquidity of their investment, they are also forced to take a very long term view of their investments. Further, they also do not have any public market which gives them the value of their investment on a daily basis.
That may not look like a very comfortable situation to the average stock investor. But for those that look at stocks as pieces of businesses, it's the perfect environment. It lets you focus your energy looking at business performance. And it would also force you to give a long hard look at the value you are receiving in return for the price you pay. This is in stark contrast to the perspective that most stock investors seem to have. They just look at stocks ticker symbols wanting its price to go up the next day, the next week or the next month.
So what are these 'business perspective investors' saying these days? As mentioned above, many of them are having a lot of difficulty finding good investments at the right valuations these days. And many PE firms seem to be chasing every opportunity, causing valuations to go skyward.
The Mint report cites the example of one of the firms that is looking to exit its investment. It has already received 22 offers from potential investors. The fund's management has been quoted as saying, “We haven't seen something like this in our 10 years of investing in India.” This tells the whole story!
Due to such a scenario, many investment committees have become extra cautious to ensure that their funds are not investing at high prices. This is one of the reasons why the actual investment deals that have been clinched by PE firms have been very few off late. And their kitty of un-invested money is piling up.
Undeniably, India is booming, led by domestic consumption. But the sad part for these PE investors is that the valuations of target firms are increasing along with the rising consumer demand in the country. And good companies bought at high valuations do not always make good investments.
Investors in the stock market would do well to take a leaf out of the book of these PE firms. That's because as valuations head higher, investors investing with a business perspective should find themselves in a similar dilemma. If you don't, it is quite likely that you are focusing on only 'price' and not 'value'.