The Privileges Of PE Investors

Imagine an initial public offering of shares from company,promising an average 15% return after five years of listing if the market returns are not higher. The question that will arise is whether it is an equity issue or a bond issue. By any definition it could be inferred as a sale of fixed income security and not equity.

It is investment into securities with such properties that has been happening for years and masquerading as private equity. Last week the Reserve Bank of India yielded to the long pending demands of the foreign private equity investors that the central bank legitimize put and call options in an equity investment contract. But the industry is still unhappy.

The issue is that such derivative contracts are legal so long as there is no assured return. Private equity investors say that this puts them at a disadvantage. But isn’t every equity investor at the same disadvantage? Is it not risk taking that gives such out sized returns? Equity investments are the riskiest form of investment and one could lose to the last paisa. But there is also an opportunity to earn many times the principal investment. This is one reason why the Securities & Exchange Board of India insists on the disclaimer ‘equity investments are subject to market risk’ on any public communication about an IPO or a mutual fund scheme. If this is the kind of risk that the less financially literate take in equity investment, then private equity investors are indeed a privileged lot with the assurances of  the mandatory return clause.This is a way of guaranteeing risk free high returns. Read more of this post