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India’s Growth Rate In December 2022, the World Bank revised its GDP forecast for 2022-23 to 6.9 percent from 6.5 percent (Oct’22) consideri

India’s Growth Rate

In December 2022, the World Bank revised its GDP forecast for 2022-23 to 6.9 percent from 6.5 percent (Oct’22) considering a strong outturn in India in the second quarter of FY 2022-23. As per the report of the World Bank titled ‘Navigating the Storm’, the Indian economy has grown rapidly in July-September 2022 as compared to other emerging economies such as China, Mexico, Brazil, Indonesia, Malaysia and the Philippines.

https://theoister.com/wp-content/uploads/2023/01/blogindia-map1.png

Inflationary Pressure

Global inflationary pressures affected countries worldwide. Governments worldwide tried to increase consumer spending to revive their economies after the pandemic. Later, the rising commodity prices, freight prices and supply chain disruption due to the Russia-Ukraine war further added to these inflation pressures. This led to record inflation numbers in many advanced and emerging economies. However, India battled inflation much better than its counterparts. According to the Economic Survey 2021-22, consumer price inflation in India was 5.6% in December 2021. Contrary to this, the inflation in the US hit 7 per cent in December 2021 and in the UK it reached a nearly 30-year high of 5.4 percent for the same period. In the emerging markets, Brazil touched 10.1 percent in December 2021.

https://theoister.com/wp-content/uploads/2023/01/blogindia-map2.png

In the year 2022, inflation peaked further due to the energy crisis and rising food prices. By the Nov’22, most of the countries nearly recovered from the rising inflation rate. In Nov’22, India improved its inflation rate from 6.77% to 5.88%. Brazil also saw a decline from 6.47% to 5.9%. While US and UK have seen slight improvement and have attained an inflation rate of 7.1% and 10.7% respectively.

Inflation Rate

CountriesNov’22PreviousChangeChina1.62.1-24%Japan3.83.73%India5.886.77-13%Brazil5.96.47-9%United States7.17.7-8%Australia7.36.120%Mexico7.88.41-7%Euro Area10.110.6-5%UK10.711.1-4%Russia1212.6-5%South Korea55.7-12%

Monetary Policies

RBI hiked the repo rate in four successive meetings to 5.9 percent in Nov’22. To reduce the liquidity in the system, RBI has been regulating currency in circulation by withdrawing regulatory relaxations, increasing the cash reserve ratio and through Variable Rate Reverse repo rate auctions. RBI has been taking out excess liquidity since Jan 2021 through the VRRR auction route. The Central bank started by taking out Rs. 2 lakh crore fortnightly in 2021 which was increased to Rs. 4 lakh crore for the fortnight ending 24th Sept’22. RBI’s stance has proven much more effective for India where it is trying to balance between rising inflation and economic growth.

International Trade Volume

India had set an ambitious export target of US$ 400 billion for FY 2021-22. It has attained more than 75% of its target by December 2021 by exporting US$ 301.4 billion. India mainly exports to the USA followed by UAE and China. Among the export commodities, Petroleum products continued to be the most exported commodity followed by Pearl, Precious, Semiprecious stones and Iron & Steel. But, in the Q1 of FY22-23, merchandise imports outgrew the exports resulting in the trade deficit.

There is a huge difference between the type of companies that a PE and a VC firm choose. For investment. PE firms invest in already succe

Type of Investment

There is a huge difference between the type of companies that a PE and a VC firm choose. For investment. PE firms invest in already successful companies that already have a well-established brand name in the market and it is looking to launch another segment of product or services. Some PEs also invest in companies which are facing thunder due to operational inefficiencies or any other structural challenge. Since PE firms are involved in aggressively managing the company, they believe to overcome these efficiencies to make the company highly profitable.

On the other hand, VCs mostly invest in startups that have innovative business ideas and business models. These companies need to develop a product or want to expand their market. Also, PE firms buy companies across industries whereas Venture capitalists do theme-based investing.

Capital Structure PEs generally hold more than 50% stake in the company while VCs hold a minority stake in the investee company. Private Equity firms use a combination of Equity and Debt which is called Leveraged Buyout whereas VCs only invest through equity.

Risk Appetite Venture Capital firms invest on the assumption that only the handful of companies that they are investing in will earn returns and the rest will fail. The goal here is not to target the company rather it is to target the industry. They invest in some promising startups in a booming industry so even if one or two startups become industry leaders, they will generate huge profits. This explains their theme-based investing. So, they take more risk than a private equity firm. Therefore, they buy a minority stake in the company to balance the risk.

#private equity firms in india #invest money to make money

There is a huge difference between the type of companies that a PE and a VC firm choose. For investment. PE firms invest in already succe

There is a huge difference between the type of companies that a PE and a VC firm choose. For investment. PE firms invest in already successful companies that already have a well-established brand name in the market and it is looking to launch another segment of product or services. Some PEs also invest in companies which are facing thunder due to operational inefficiencies or any other structural challenge. Since PE firms are involved in aggressively managing the company, they believe to overcome these efficiencies to make the company highly profitable.

On the other hand, VCs mostly invest in startups that have innovative business ideas and business models. These companies need to develop a product or want to expand their market. Also, PE firms buy companies across industries whereas Venture capitalists do theme-based investing.

Capital Structure

PEs generally hold more than 50% stake in the company while VCs hold a minority stake in the investee company. Private Equity firms use a combination of Equity and Debt which is called Leveraged Buyout whereas VCs only invest through equity.

Risk Appetite

Venture Capital firms invest on the assumption that only the handful of companies that they are investing in will earn returns and the rest will fail. The goal here is not to target the company rather it is to target the industry. They invest in some promising startups in a booming industry so even if one or two startups become industry leaders, they will generate huge profits. This explains their theme-based investing. So, they take more risk than a private equity firm. Therefore, they buy a minority stake in the company to balance the risk.

On the other hand, Private Equity firms invest in the company. They not only bet on the industry but also on the potential of the investee company. Since they hold a majority stake in the company, they are very actively involved in the management. Here, the endeavour is to make the investee company an industry leader rather than betting on multiple companies from the same industry.

So, the fate of PE funds depends on that particular company. Therefore, a PE firm does rigorous due diligence before investing in any company to reduce the risk to almost zero.

Exit Strategies

For Private Equity, the exit strategy is usually to sell the stake at a higher valuation to another PE firm or hedge fund. On the other hand, Venture capitalists exit through IPO, mergers & acquisitions or share buy-back. Venture Capitalists target to cash on post-IPO profits after the lock-in period. They also exit through the merger & acquisition route where they sell their minority stake to another company within the industry for which the startup proves to be a synergy.

#private equity firms in india #invest money to make money

India’s Growth Rate - oisterglobal In December 2022, the World Bank revised its GDP forecast for 2022-23 to 6.9 percent from 6.5 percent (Oc

In December 2022, the World Bank revised its GDP forecast for 2022-23 to 6.9 percent from 6.5 percent (Oct’22) considering a strong outturn in India in the second quarter of FY 2022-23. As per the report of the World Bank titled ‘Navigating the Storm’, the Indian economy has grown rapidly in July-September 2022 as compared to other emerging economies such as China, Mexico, Brazil, Indonesia, Malaysia and the Philippines.

Inflationary Pressure Global inflationary pressures affected countries worldwide. Governments worldwide tried to increase consumer spending to revive their economies after the pandemic. Later, the rising commodity prices, freight prices and supply chain disruption due to the Russia-Ukraine war further added to these inflation pressures. This led to record inflation numbers in many advanced and emerging economies. However, India battled inflation much better than its counterparts. According to the Economic Survey 2021-22, consumer price inflation in India was 5.6% in December 2021. Contrary to this, the inflation in the US hit 7 per cent in December 2021 and in the UK it reached a nearly 30-year high of 5.4 percent for the same period. In the emerging markets, Brazil touched 10.1 percent in December 2021.

In the year 2022, inflation peaked further due to the energy crisis and rising food prices. By the Nov’22, most of the countries nearly recovered from the rising inflation rate. In Nov’22, India improved its inflation rate from 6.77% to 5.88%. Brazil also saw a decline from 6.47% to 5.9%. While US and UK have seen slight improvement and have attained an inflation rate of 7.1% and 10.7% respectively.

Monetary Policies RBI hiked the repo rate in four successive meetings to 5.9 percent in Nov’22. To reduce the liquidity in the system, RBI has been regulating currency in circulation by withdrawing regulatory relaxations, increasing the cash reserve ratio and through Variable Rate Reverse repo rate auctions. RBI has been taking out excess liquidity since Jan 2021 through the VRRR auction route. The Central bank started by taking out Rs. 2 lakh crore fortnightly in 2021 which was increased to Rs. 4 lakh crore for the fortnight ending 24th Sept’22. RBI’s stance has proven much more effective for India where it is trying to balance between rising inflation and economic growth.

International Trade Volume India had set an ambitious export target of US$ 400 billion for FY 2021-22. It has attained more than 75% of its target by December 2021 by exporting US$ 301.4 billion. India mainly exports to the USA followed by UAE and China. Among the export commodities, Petroleum products continued to be the most exported commodity followed by Pearl, Precious, Semiprecious stones and Iron & Steel. But, in the Q1 of FY22-23, merchandise imports outgrew the exports resulting in the trade deficit.

#private equity firms in india #alternative investment funds

Private Equity is a bigger concept while Venture Capital is a subset of Private Equity

Most of the time Private Equity is considered synonymous with Venture Capital. But, there is a huge difference between the two. Private Equity is a bigger concept while Venture Capital is a subset of Private Equity.

Private Equity

Private Equity firms invest in businesses that have promising growth potential and exit the company at a higher valuation multiple. They generally invest in businesses through Leveraged Buyout strategy. According to this, a major investment is made by the private equity through debt and the rest is funded through PE’s own funds. The debt is taken by keeping the assets of the investee company as collateral. The future cash flows generated will be used to reduce the proportion of debt eventually. This will automatically increase the value of the equity stake held. Most PE firms follow this strategy for investment. Apart from this, another method is growth equity and Venture Capital.

Venture Capital

Venture Capital firms also invest in businesses that have huge growth potential. They mostly invest in startups that have a promising business idea or an established target market. There are various rounds of VC funding depending on the business stage of the startup. Most of the VCs aim to either exit from the company through IPO or by Mergers and acquisitions.

Here Are the Key Differences Between PE and VC

Type of Investment

There is a huge difference between the type of companies that a PE and a VC firm choose. For investment. PE firms invest in already successful companies that already have a well-established brand name in the market and it is looking to launch another segment of product or services. Some PEs also invest in companies which are facing thunder due to operational inefficiencies or any other structural challenge. Since PE firms are involved in aggressively managing the company, they believe to overcome these efficiencies to make the company highly profitable.

On the other hand, VCs mostly invest in startups that have innovative business ideas and business models. These companies need to develop a product or want to expand their market.

Also, PE firms buy companies across industries whereas Venture capitalists do theme-based investing.

Capital Structure

PEs generally hold more than 50% stake in the company while VCs hold a minority stake in the investee company. Private Equity firms use a combination of Equity and Debt which is called Leveraged Buyout whereas VCs only invest through equity.

Risk Appetite

Venture Capital firms invest on the assumption that only the handful of companies that they are investing in will earn returns and the rest will fail. The goal here is not to target the company rather it is to target the industry. They invest in some promising startups in a booming industry so even if one or two startups become industry leaders, they will generate huge profits. This explains their theme-based investing. So, they take more risk than a private equity firm. Therefore, they buy a minority stake in the company to balance the risk.

On the other hand, Private Equity firms invest in the company. They not only bet on the industry but also on the potential of the investee company. Since they hold a majority stake in the company, they are very actively involved in the management. Here, the endeavour is to make the investee company an industry leader rather than betting on multiple companies from the same industry.

So, the fate of PE funds depends on that particular company. Therefore, a PE firm does rigorous due diligence before investing in any company to reduce the risk to almost zero.

Exit Strategies

For Private Equity, the exit strategy is usually to sell the stake at a higher valuation to another PE firm or hedge fund. On the other hand, Venture capitalists exit through IPO, mergers & acquisitions or share buy-back. Venture Capitalists target to cash on post-IPO profits after the lock-in period. They also exit through the merger & acquisition route where they sell their minority stake to another company within the industry for which the startup proves to be a synergy.

In some cases, the startup itself buys back the minority stake from VCs at higher valuation multiples so that the control remains undiluted.

To Sum Up

PE and VC, both play their strategic roles in funding businesses. Private Equity firms invest in a company which they believe to turn around and eventually sell at a profit. VCs mostly bet on a growing industry and hold strategic positions in most startups operating in that industry. They mostly wish to exit the company through IPO or by selling it to another company. PEs, on the other hand, generally, sell their stake to another PE fund. VCs take slightly higher risks as compared to PE firms. VCs invest their capital based on the assumption that only a few startups will be a success while PE firms invest because they believe that company to be successful.

Investment success hinges on rigorous due diligence. At Oister, we’ve developed a seven-step process for selecting VC/PE funds to invest in,

Deciphering the Oister Approach: A Comprehensive Guide to Our Seven-Step Due Diligence Process for VC/PE Fund Selection

Investment success hinges on rigorous due diligence. At Oister, we’ve developed a seven-step process for selecting VC/PE funds to invest in, focused on thorough analysis and risk mitigation. This article provides an overview of our approach, highlighting how we deal with the complexities of fund selection, especially in India’s burgeoning market.

Fund III+ Is the fund being raised at least the manager’s third fund? Usually it takes until the third fund for there to be enough track record to observe how the manger handles the full cycle from pipeline, to value addition, to exit. It is also at the third fund that there is enough information to assess the strength of the franchise. There are circumstances under which Oister will consider an earlier fund, but as a rule Oister only considers Funds III and beyond. Quartile Performance: Unlike the past performance of public equity the past performance of VC/PE funds provides information about likely future performance. A manager whose past funds have been in the top two performance quartiles is more likely to have future funds in the top two quartiles than a manager with historical performance in the lower two quartiles. We use market indices to identify the quartile rankings of a manager’s past funds. The use of indices in VC/PE requires judgement as there are structural issues with all the available indices. In India it requires a little more judgement than it does in the USA and EU as the market is relatively young and the benchmarks are still evolving.

Investment results depend on both the skill of the investor and the opportunity the investor has to work with. The opportunity is mostly dri

Macroeconomic Phase Change And What it Means For PE & VC

Investment results depend on both the skill of the investor and the opportunity the investor has to work with. The opportunity is mostly driven by macroeconomic conditions at the time and the government policy environment. How can we think about private equity and venture capital in light of the recent rise in inflation and interest rates? The Background Story To view the current situation with enough perspective, it is necessary to take in a longer sweep of time than just the last few years.

It is obvious that the rise in inflation during 2021 and the consequent rise in interest rates have changed the macroeconomic environment within which the GPs of PE and VC funds work to create returns for investors. What may not be obvious is the larger significance of this change in the broader macroeconomic environment.

What we are currently experiencing is likely to be significant enough that, in hindsight, it will be seen as a phase change, as the beginning of an entirely new long term macroeconomic cycle.

This is because until the recent rise in inflation the World has enjoyed a forty-year decline in interest rates (see Chart 1 below) which has been good for all asset classes.

#private equity firms in india #invest money to make money

Moreover, India has emerged as a leader in developing economies and showed better resilience from global headwinds as compared to other nations.

India’s Resilience in the Face of Global Headwinds

Global Markets are witnessing continuous headwinds like inflation, the energy crisis, the Russia-Ukraine war, supply chain disruption, tightening of monetary policies, etc. While all this has brought European and American countries to the brink of a crisis, many South Asian countries showed their potential to end the domination of developed economies. Moreover, India has emerged as a leader in developing economies and showed better resilience from global headwinds as compared to other nations.

India’s Growth Rate In December 2022, the World Bank revised its GDP forecast for 2022-23 to 6.9 percent from 6.5 percent (Oct’22) considering a strong outturn in India in the second quarter of FY 2022-23. As per the report of the World Bank titled ‘Navigating the Storm’, the Indian economy has grown rapidly in July-September 2022 as compared to other emerging economies such as China, Mexico, Brazil, Indonesia, Malaysia and the Philippines.

Inflationary Pressure Global inflationary pressures affected countries worldwide. Governments worldwide tried to increase consumer spending to revive their economies after the pandemic. Later, the rising commodity prices, freight prices and supply chain disruption due to the Russia-Ukraine war further added to these inflation pressures. This led to record inflation numbers in many advanced and emerging economies. However, India battled inflation much better than its counterparts. According to the Economic Survey 2021-22, consumer price inflation in India was 5.6% in December 2021. Contrary to this, the inflation in the US hit 7 per cent in December 2021 and in the UK it reached a nearly 30-year high of 5.4 percent for the same period. In the emerging markets, Brazil touched 10.1 percent in December 2021.

In the year 2022, inflation peaked further due to the energy crisis and rising food prices. By the Nov’22, most of the countries nearly recovered from the rising inflation rate. In Nov’22, India improved its inflation rate from 6.77% to 5.88%. Brazil also saw a decline from 6.47% to 5.9%. While US and UK have seen slight improvement and have attained an inflation rate of 7.1% and 10.7% respectively.

Monetary Policies RBI hiked the repo rate in four successive meetings to 5.9 percent in Nov’22. To reduce the liquidity in the system, RBI has been regulating currency in circulation by withdrawing regulatory relaxations, increasing the cash reserve ratio and through Variable Rate Reverse repo rate auctions. RBI has been taking out excess liquidity since Jan 2021 through the VRRR auction route. The Central bank started by taking out Rs. 2 lakh crore fortnightly in 2021 which was increased to Rs. 4 lakh crore for the fortnight ending 24th Sept’22. RBI’s stance has proven much more effective for India where it is trying to balance between rising inflation and economic growth.

International Trade Volume India had set an ambitious export target of US$ 400 billion for FY 2021-22. It has attained more than 75% of its target by December 2021 by exporting US$ 301.4 billion. India mainly exports to the USA followed by UAE and China. Among the export commodities, Petroleum products continued to be the most exported commodity followed by Pearl, Precious, Semiprecious stones and Iron & Steel. But, in the Q1 of FY22-23, merchandise imports outgrew the exports resulting in the trade deficit.

#India’s Resilience in the Face of Global Headwinds

Investment results depend on both the skill of the investor and the opportunity the investor has to work with. The opportunity is mostly driven by macroeconomic conditions at the time and the government policy environment. How can we think about private equity and venture capital in light of the recent rise in inflation and interest … Continue reading "Macroeconomic Phase Change And What it Means For PE & VC"

Macroeconomic Phase Change And What it Means For PE & VC - OISTER

Investment results depend on both the skill of the investor and the opportunity the investor has to work with. The opportunity is mostly driven by macroeconomic conditions at the time and the government policy environment. How can we think about private equity and venture capital in light of the recent rise in inflation and interest rates? The Background Story To view the current situation with enough perspective, it is necessary to take in a longer sweep of time than just the last few years.

It is obvious that the rise in inflation during 2021 and the consequent rise in interest rates have changed the macroeconomic environment within which the GPs of PE and VC funds work to create returns for investors. What may not be obvious is the larger significance of this change in the broader macroeconomic environment.

What we are currently experiencing is likely to be significant enough that, in hindsight, it will be seen as a phase change, as the beginning of an entirely new long term macroeconomic cycle. This is because until the recent rise in inflation the World has enjoyed a forty-year decline in interest rates (see Chart 1 below) which has been good for all asset classes.

Chart 1: Forty years of a declining trend in interest rates

Chart 2: Inflation declines from an historical peak and stays low until recently Pause to think about that. For roughly forty years, through all the major events which caught our attention from the fall of the Berlin Wall, the economic rise of China, the dot-com bubble, Sept 11th, the GFC and Covid, in the background interest rates have been trending downwards. For the adult lifetime of part of Gen X, and all Millennials and Gen Z, the background declining trend in interest rates has, except for the periods immediately around major negative events, supported a benign environment for investment so that as markets moved past shocks they could recover quickly.

The initial decline in interest rates was brought about by the decline in inflation from historical peaks following the decisive action of the US Federal Reserve under Paul Volker (see Chart 2). This was accompanied by increased independence being given to Central Banks, in order to distance politicians from the temptation to manipulate the money supply for short term political gain and to give the public greater confidence in the stability of the value of money.

#Macroeconomic Phase Change #Forty years of a declining trend #Current Moment in Time

Unlocking the Treasure Chest of GIFT City : India’s Business District at the Forefront of Financial Innovation! Welcome to GIFT City, the ...

Unlocking the Treasure Chest of GIFT City : India’s Business District at the Forefront of Financial Innovation! Welcome to GIFT City, the business district in Gujarat, India that’s revolutionizing the financial services industry and other technology-driven sectors. Divided into two zones, the Special Economic Zone (SEZ) and the Domestic Tariff Area (DTA), GIFT City boasts state-of-the-art infrastructure, including high-speed data networks, reliable power supply, and advanced safety and security measures. But what exactly is IFSC in GIFT City? IFSC, or International Financial Services Centre, is India’s first offshore financial center that offers a wide range of financial services to Indian corporate businesses and overseas branches/subsidiaries of financial institutions. The IFSC in GIFT City offers a commercial and regulatory environment that’s comparable to London and Singapore, providing Indian corporations with easier access to global financial markets while also promoting the development of India’s financial markets. One of the many benefits of setting up an IFSC unit in GIFT City is tax benefits on income, including 100% income tax exemption for 10 out of 15 years. In addition, investors can enjoy interest income that’s not taxable for money lent to IFSC units and can benefit from a lower tax rate of 4% for long-term bonds and rupee-denominated bonds listed on IFSC exchanges. GIFT City also provides GST benefits, with no GST on services received by the unit in IFSC or provided to IFSC/SEZ units and offshore clients. Operational benefits include exemption from currency control regulations to IFSC units and a liberalized currency control regime for Indian residents, enabling them to set up and invest funds in GIFT City. The services rendered in GIFT City are vast and include raising funds for individuals, corporations, and governments, asset management and global portfolio diversification, global tax management, corporate treasury management operations, risk management operations such as insurance and reinsurance, and merger and acquisition activities among multinational corporations. In conclusion, GIFT City is the ultimate destination for wealth managers and Indian HNIs looking to invest in a state-of-the-art business district with top-notch infrastructure and financial services. With its many benefits, GIFT City is truly a gift to investors looking to tap into the global financial market.

#Unlocking the Treasure Chest of GIFT City #GIFT City Gains Momentum

The demise of SVB does not indicate a problem with the credit quality of venture debt or any issues with the venture debt model. SVB’s problems did not come from its portfolio of loans to VC-backed companies. Rather, SVB’s problems came from the way it chose to structure its balance sheet, holding a much larger … Continue reading "Silicon Valley Bank – How does this relate to Venture Debt?"

Silicon Valley Bank – How does this relate to Venture Debt? - OISTER

The demise of SVB does not indicate a problem with the credit quality of venture debt or any issues with the venture debt model. SVB’s problems did not come from its portfolio of loans to VC-backed companies. Rather, SVB’s problems came from the way it chose to structure its balance sheet, holding a much larger proportion of its assets in long-term Govt bonds than most banks while having a greater proportion of larger more interest-rate-sensitive depositors than most banks.

A report from RBC Capital Markets ranked the 100 largest US banks in terms of various balance-sheet characteristics. SVB was 99th in the proportion of its deposits that were under $250,000, at less than 3 per cent. SVB had a large proportion of large business depositors, and large business depositors are extremely price sensitive. They demand more interest as soon as they see rates rise. Small retail depositors do not. As a result SVB’s margins came under prerssure faster than those of most banks.

In the same report, on the proportion of total bank assets held in securities SVB was first, at 55 per cent. A typical bank might hold around 25% of its assets in long term debt. Most banks own a lot of floating rate loans that pay more when rates rise. SVB was stuck with long dated bonds with low yields, which meant it would take longer for its portfolio to roll over and allow it to begin to earn higher yields. This came about because during the boom years of 2021 and 2022 SVB’s VC clients enjoyed large cash inflows which they deposited with the bank. As its deposit base more than doubled in a short period, SVB invested most of those additional deposits into long dated fixed-rate govt bonds, and much less into new lending (see chart below from the Financial Times).

It was the structural tension between a large quantity of assets whose yields were not going to rise for years and liabilities which were more interest rate sensitive than those of the average bank which lead to SVBs problems.

#silicon valley bank #silicon valley bank India #RBC Capital Markets Ranked

ŠKODA SUPERB Ex-Showroom Price in Faridabad - Excel Skoda ŠKODA presents the new ŠKODA SUPERB, immerse yourself in luxury bound by an icon...

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First time investors in private equity funds are sometimes alarmed / confused / surprised to learn that their fund investment has a negati...

Decoding the J-Curve

First time investors in private equity funds are sometimes alarmed / confused / surprised to learn that their fund investment has a negative return in the early years of the fund’s life. Then, to their relief, as the fund ages, the fund’s return increases.

The J-curve is so-called because the performance of the fund, as measured by its internal rate of return (IRR), is typically negative in the early years as these are the years of outflow, before turning positive and eventually reaching a peak.

Below is a graphical representation of the J-curve:

The negative return or the downward slope of the fund can be attributed to the following reasons:

Fund organizational expenses: Funds are expensive to form. Formation expenses include legal, accounting, tax, and travel. These organizational expenses can run from hundreds of thousands of dollars to over a million dollars. It is customary for the fund to reimburse the fund’s general partner for these organizational expenses (up to a negotiated cap). These expenses are paid from the initial capital called by the fund Management fees: The fund will pay the GP a management fee, which is usually 2% of committed capital each year during the investing phase of the fund’s life (the first 5 years). This management fee is paid in quarterly installments, in advance Fund expenses: The fund also has annual expenses that it pays, including insurance, accounting fees, legal fees, back office fees, brokerage, etc. These expenses aren’t usually very significant but they have a greater impact early in the fund’s life Portfolio valuation: Poor investments are often recognized by the GPs of the fund early, while good investments will typically take a longer time to mature and show positive results. If a GP recognises investments that are likely to fail, they will mark-down or write-off the carrying value of that investment, leading to the negative returns in the early phase These expenses, along with the fact that investments are not yet generating returns, cause the IRR to be negative in the early years.

As time passes and investments start to generate positive returns, the J-curve starts to show an upward slope. This is known as the inflection point, or the point where the J-curve starts to change direction.

As the fund’s portfolio companies start to generate cash flow and are exited, the IRR continues to grow and eventually reaches a peak.

It is important to note that the J-curve is a typical performance of private equity / venture capital funds and not all funds will experience it. It also can vary in duration, inflection point and height based on the fund’s investment strategy, market conditions and management skill. Additionally, the J-curve performance is generally reported net of all fees and expenses, which can be substantial and should be considered when evaluating the overall performance of a fund.

Exhibit 1 shows a deep and pronounced J-curve, indicating extremely poor performance of a fund. Exhibit 2 shows the J-curve for a fund where the portfolio companies have been written off as no positive IRRs were generated. Exhibit 3 is an ideal situation wherein the portfolio companies have generated positive returns quickly, leading to an upward slope early on in the fund lifecycle.

#Decoding the J-Curve #Decoding private equity value creation #oxyhemoglobin dissociation curve #j-curve private equity #j-curve private equity Online

Decoding the performance of alternative investment funds is crucial before making an investment decision. Various metrics are used by the...

Decoding the performance of alternative investment funds is crucial before making an investment decision. Various metrics are used by the PE industry to measure the profitability of a deal. Let’s discuss some of the common metrics that you as an investor should be aware of to evaluate your private equity investment journey.

Internal Rate of Return

The most common metric used by the PE/VC industry is the Internal Rate of Return. It tells you the annual rate of return on the investment made by taking into account capital calls and distributions over the fund’s lifetime. It can also be viewed as a discount rate that would render the Net Present Value of all investments zero. IRR is considered an important metric for private equity funds as it takes into account multiple cash inflows and outflows incurred during the fund’s lifetime.

Certain assumptions are used in IRR, so do not interpret it the same as CAGR. The major drawback in IRR calculation is that it values the money returned earlier more than the money returned later. So, even though a fund has returned the same amount of capital in the end, the IRRs of the two funds can be different. A fund that has returned a higher amount in the first 2-3 years is likely to have a higher IRR than a fund that returned a major chunk of capital in the 5th or 6th year. It assumes that the capital distributed is reinvested at the same IRR that was generated at the initial exit.

Modified IRR

The defects of assumptions in IRR can be overcome by looking at MIRR. While IRR assumes that all the cash flows are reinvested at the IRR rate, the MIRR takes into account the cash flows distributed to investors and fees paid to general partners.

Modified IRR takes into account the effect of preferred returns and hurdle rates which are essential for determining the expected returns of the investment. Preferred return is the minimum rate of return that investors receive before the General Partners begin to receive a share of the profit. This preferred return may be fixed as a percentage of invested capital. The hurdle rate is the minimum rate of return that the fund is expected to cross to give performance fees to General Partners. The hurdle rate is generally set higher than the preferred return.

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India indeed will depict promising growth but the fact that the PE/VC industry is still at a very nascent stage cannot be denied. The private equity industry is surrounded by multiple laws such as the Companies Act, 2013, regulations by SEBI and RBI and Income Tax Act,1961. Though foreign investors are pouring money into India … Continue reading "Conquering Indian PE Regulation: Overcoming the Challenges"

Conquering Indian PE Regulation: Overcoming the Challenges

India indeed will depict promising growth but the fact that the PE/VC industry is still at a very nascent stage cannot be denied. The private equity industry is surrounded by multiple laws such as the Companies Act, 2013, regulations by SEBI and RBI and Income Tax Act,1961. Though foreign investors are pouring money into India given the future investment outlook, some regulatory challenges are lurking around this industry. Before discussing challenges, let’s first understand the regulatory framework that governs private equity in India.

Private Fund Structuring Alternative Investment Funds in India can be set up in the form of a Trust, LLP or Company in India. The most common structure that can be seen in India is Trusts. The restrictions of the Companies Act, 2013 generally repel the PE industry to structure as a company. Similar is the case with LLPs. These Alternative Investment Funds have to register with SEBI under SEBI (AIF) Regulations, 2012. The regulations by SEBI require the fund to define its expected return on investment, investment strategy and targeted investors. As per these Regulations, the funds are divided into three categories viz. Category I, II and III. Category I is the category of funds that mainly invests in start-ups, SMEs and Government sector funds. Category II includes private equity or debt funds. Category III includes AIFs that invest in Hedge Funds. To protect the investors, the regulations mandate the sponsor/Manager of the AIF to have a continuing interest that cannot be waived and locked till the distributions have been made to every other investor. The minimum corpus for any AIF should be Rs. 20 crores though, for Angel Funds or Social Impact Funds, the minimum corpus is Rs. 5 Crore. As per the regulations, an AIF cannot accept any investment less than Rs. 1 Crore. However, Angel Funds can accept an investment of Rs. 25 Lakhs.

Current Challenges in PE/VC space The growth prospects of India have attracted a major portion of private capital from foreign investors. Though they still face challenges in terms of taxation and lack of a single window to address any issue faced by the PE industry. Here are certain current challenges that are raised by this industry.

Taxation of Carried Interest Carried Interest is the equity stake that a General Partner gets in the fund. This interest is held by the GP till the distribution of profits to every other investor. For taxation purposes, the government treats it as income from services rendered by a GP. This makes it taxable under Income tax as well as GST. Contrary to this, in other countries like UK and US, these are treated as capital gain from shares and do not attract dual tax laws. This gives an edge to foreign funds over Indian funds as the former faces fewer compliance issues.

Long-Term Capital Gain of Shares Another challenge faced by the Private equity industry is the taxation of Long term capital gain on shares. An investor selling listed securities has to pay a tax of 10% on LTCG while for the unlisted securities the tax rate hikes up to 20%. Bringing an indifferent taxation policy could attract more capital from domestic investors.

Round-Tripping Regulations Round-Tripping regulations have been a barrier for Indian private equity funds for a very long time. Though, in August 2022, the RBI amended certain regulations that relaxed round-tripping regulations still it becomes next to impossible for HNIs to invest in offshore funds. In Round-tripping, an Indian firm sets up a foreign firm and channelizes funds through that foreign firm back into India. This practice could be done to evade taxes. To curb this, RBI has placed strict regulations in place to prevent this. Therefore, earlier, fund managers and investors could not invest in an offshore fund that invests back in India. Now, this has been relaxed and investments can be made by an Indian entity into a foreign entity that has investments in India. Although such a structure should not have more than two layers of subsidiaries. There are two routes for HNI investment in offshore funds i.e. ODI (Overseas Direct Investment) and OPI (Overseas Portfolio Investment) route. Currently, HNIs are not permitted to invest in a foreign entity that is engaged in financial services activity. Under the OPI route, the investments can be made into offshore funds only if the structure of the fund is that of a trust and it issues units to its investors. This acts as a hindrance for HNIs to invest in offshore funds as most offshore funds are set up such that they issue equity shares rather than units.

The way forward The issues have been raised constantly by the Indian Venture and Alternative Capital Association in front of the government. To address this, the Finance Minister has set up an expert committee to look into the matter. The PE/VC industry has also demanded to allow perpetual funds in India. These types of funds do not have exit deadlines or capital calls or a fixed fund life. As the name suggests, investors are invested for a longer period to earn high returns. There is also a need to relax taxation laws on ESOPs as more new-age companies are incentivising employees through it to attract good talent.

Since the population of HNIs in India has been growing drastically, there is a need to bring encouraging reforms in the private equity market. It is expected that the panel of experts set up by the government could bring some incentivising reforms in this space in the coming years which would ease investments for HNIs and family offices.

#Conquering Indian PE Regulation #private equity rules #physical education in india

At the start of 2020, there were many changes in economic and geopolitical scenarios which led to a change in the investment strategy altogether. New avenues of wealth creation were discovered such as cryptocurrencies, metaverse-related products, blockchain startups, tech startups, etc. These avenues not only made the Rich list longer but also changed the demographics … Continue reading "Disrupting the Rich List: How Wealth Creation Avenues Have Shifted"

Disrupting the Rich List: How Wealth Creation Avenues Have Shifted

At the start of 2020, there were many changes in economic and geopolitical scenarios which led to a change in the investment strategy altogether. New avenues of wealth creation were discovered such as cryptocurrencies, metaverse-related products, blockchain startups, tech startups, etc. These avenues not only made the Rich list longer but also changed the demographics of that list entirely. There are more GenZs and millennials included on the list and more billionaires that have added wealth in the tech boom.

The Great Indian Rich List

India is not behind in this Rich list among countries. As per Capgemini Wealth Report 2022, The HNWI wealth grew by 11.6% in India while the global wealth only grew by 8%. The number of individuals with INR 1000 crore wealth has increased by 62% in India over the last five years, according to IIFL Wealth Hurun India Rich List 2022. Out of these individuals, 67% were self-made. The growth was mainly due to increased global confidence, well-managed liquidity by RBI, encouraging government policies and rapid digitalization.

The new entrants in the Rich list made their place through chemicals and financial services and pharma leading the way has contributed 126 entrants to the list. The demographics of the Rich list further changed than last year as the youngest on the list is aged 19, four years younger than the youngest last year.

Wealth Trends in India

India has had unequal wealth distribution over the past two decades. This inequality gap has been rising till 2015 after which it started to improve. If you look at the Gini Coefficient which measures this wealth inequality gap, it has been declining since 2015. A higher Gini Coefficient means higher inequality. As per the Credit Suisse Global Wealth Report 2022, the Gini coefficient of India was 83.3 while in 2021 it has been reduced to 82.3.

Regarding the number of millionaires, the Credit Suisse Report estimates that the number of millionaires in India will double to around 1.6 million in 2026. Though India is facing headwinds from global cues, it has still managed to show much more resilience. Despite stock prices falling by almost 9% in the first half of 2022, the wealth per adult saw a splendid rise in India. The average annual growth rate of wealth per adult for the world since 2000 has been 5% while for India, the same has been 8.8%.

Dynamics of Private Wealth in India

The rise in per capita income and changes in the lifestyle of millennials have provided an impetus to the wealth management industry. The affluent middle-class population in India is rising along with HNI and Ultra-HNI populations. The growth forecast for 2020-25 of the HNI population is 75% and that of the Ultra-HNI population is 63%. There has been a paradigm shift in how Indians perceive their investments and the distribution of asset classes. More and more people are doing goal-based investments and want to spend on luxury experiences. There has been a newfound importance of alternative investments rather than parking all the money in traditional investments. This is due to a rise in risk appetite and better returns offered by these asset classes.

The Financial investable Wealth of ultra-HNIs has seen an increase in India by around 17% in 2020 as compared to 2019. Further, there is an expected increase of $0.5 trillion during the period 2020-25 as per the BCG Global Wealth Report 2021.

The Indian wealth industry is changing very fast which is making people more aware of the need to invest in alternative asset classes such as private equity. The HNIs and UHNIs have no longer limited their investment to traditional assets or even their own businesses but rather are expanding their portfolio to benefit from the country’s growth. They are doing so by investing in promising startups and growing businesses.

#Disrupting the Rich List #Disrupting the Rich List 2023 #top richest person in world #who is the richest person in world

Venture Debt is a loan given to startups that have already secured funding from venture capital.

A Beginner’s Guide to Venture Debt: Here’s What You Need to Know

Venture Debt is a loan given to startups that have already secured funding from venture capital. It aims to meet the financial needs of the startup before it goes for the next funding round from the VCs. Venture Debt is a short-term loan given to early-age startups which typically ranges from 2-3 years. They expect that they will be repaid from the following funding proceeds. So, before providing debt to startups they evaluate their capacity to raise the next funding.

How does Venture Debt work? Venture Debt firms provide funding to startups that do not have assets or cash flows to raise funds through traditional debt. The main criteria for providing Venture Debt is that the startup must have secured VC funding. Generally, the amount of venture debt is 30-40% of the previous VC funding. The amount of the loan also depends on the stage of the startup. A startup in its early stage gets less funding as compared to that at a later stage.

Venture Debt funds’ objective is to increase startups’ valuation by providing additional funding required before the next funding round. The funding decision is taken by looking at the performance targets and due diligence reports of the last VC funding. VD firms charge only interest for a period of about a year and do not expect principal repayment.

Venture Debt funds are given the option to convert their loan into shares in the event of loan repayment default. These are called warrants. So, in event of default, there can be an equity dilution.

What do Venture Debt firms evaluate before underwriting loans? Apart from having VC funding, Venture Debt firms look for the following criteria:

Revenue Profile: Though there may not be any positive cash flow at the time of raising debt VDs to look for sustainable revenue models before funding. A revenue model which is going to provide recurring cash flows is going to attract more capital. To evaluate this, VD firms look at the metrics such as monthly recurring revenue and average revenue per user. Burn Rate: VDs also look at the burn rate to determine how efficiently the startup is deploying cash to generate revenue. Liquidity: The VD firms also evaluate the liquidity of the startup by seeing the Startup Runway. The runway is the number of months that a startup can survive before it runs out of cash. Generally, a runway of around 18 months is considered good for an early-age startup.

#Venture Debt #Venture Debt Online #Venture Debt Firm #Venture Debt Online India

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