When it comes to Private Equity (PE), there can be numerous schools of thought. You have the group that would completely go gaga over PE. You have another that would simply want to wipe off this infatuation from the market. There is also one that would hold PE responsible for failed, inefficient and weak government policies. In India unfortunately, what we have (mostly) seen so far is the havoc that PE has caused. And I clearly see it as one key reason that has snowballed into the economic crisis that we face today.
It was back in 1946 when PE emerged in the American market in its true sense. The era between 1960s to 1980s saw the Vanderbilts, Whitneys, Rockefellers and Warburgs build fortunes in businesses ranging from real estate construction projects to airlines, banking to whatever moved on the streets of Silicon Valley. Running parallel and equally fast was Warren Buffet, who through Leverage Buy-Outs (LBOs) acquired one corporation after another. The US Congress then opposed every change in tax policy that could have made life more difficult for PE firms (the Carter Tax Plan of 1977 was the first of such acts that failed to be enacted). What followed up until 1990 was quite understandable (given the quick, sweet success PE had witnessed in its early years). Thousands of PE labels mushroomed across the globe.
But beneath this rolling of the Red Carpet was a weakly-constructed foundation. Cracks on the PE wall first became visible in the first half of the 1990s. Ills related to the massive rise in leveraged buyouts that were financed by junk bonds led to the-then collapse of the LBO industry. Amidst various companies that went into a tailspin was a big name – Drexel Burnham Lambert. This one company that was credited for the boom in PE back in the 1980s had several allegations made against it. The firm was charged with insider trading and had to file for Chapter 11 in 1990. Thus, one of the founding pillars of PE was turned to dust. Companies and markets across the globe experienced a similar avalanche.
The ‘true’ global effect of PE became more publicised and shamefully dramatic in the early 21st century. It began with the dot-com bubble bursting. This disaster has so far caused the maximum damage because it sent more than just tremors across the global financial market. It shook the very belief in Private Equity (and Venture Capitalism). In the quick years that followed this early 2000s disaster, more than half of PE firms that had invested their dimes and coffers in web start-ups were forced to throw in their towels. Of course, the market as a whole, and the investors were left at the mercy of no modern capitalistic gods. Many IT firms that had become bigger with the prime support of PE saw the cash and asset balance levels in their wells fall. Much below even the amount of capital initially invested! And the biggest reason for such an unwanted outcome was that those very PE firms that had promised to fuel their dreams ran out of fuel themselves. They backed out in the name of retreat and failed to live up to their investment commitments. By the end of the year 2000, globally, the count of PE firms fell by a horrific 50 per cent!
Obviously, India was not one to remain idle when it came to being mesmerised by this hypnotic trick and believing in the permanent magic of a volatile formula. It was one of those markets that felt the maximum impact of the dot-com bubble slap. The Indian IT industry came under huge pressures – returns vapourised for some time and much hope was lost. There are huge apprehensions still – that have spread to other verticals. Even today, every now and then, cases of insider trading and embezzlement are reported across various sectors. And we’re not even counting unrevealed scams yet. Private equity dealings in the first decade of the 21st century has left us in ruins. Worse, during this period, PE entered one sector after another and that resulted in excess supply being created. The bubble of a hope that PE generated ruined organisations far and wide – some temporarily and some forever – with excess pressure of expansion that has left them in a complete mess with visible supply-demand mismatch.
It was back in 1946 when PE emerged in the American market in its true sense. The era between 1960s to 1980s saw the Vanderbilts, Whitneys, Rockefellers and Warburgs build fortunes in businesses ranging from real estate construction projects to airlines, banking to whatever moved on the streets of Silicon Valley. Running parallel and equally fast was Warren Buffet, who through Leverage Buy-Outs (LBOs) acquired one corporation after another. The US Congress then opposed every change in tax policy that could have made life more difficult for PE firms (the Carter Tax Plan of 1977 was the first of such acts that failed to be enacted). What followed up until 1990 was quite understandable (given the quick, sweet success PE had witnessed in its early years). Thousands of PE labels mushroomed across the globe.
But beneath this rolling of the Red Carpet was a weakly-constructed foundation. Cracks on the PE wall first became visible in the first half of the 1990s. Ills related to the massive rise in leveraged buyouts that were financed by junk bonds led to the-then collapse of the LBO industry. Amidst various companies that went into a tailspin was a big name – Drexel Burnham Lambert. This one company that was credited for the boom in PE back in the 1980s had several allegations made against it. The firm was charged with insider trading and had to file for Chapter 11 in 1990. Thus, one of the founding pillars of PE was turned to dust. Companies and markets across the globe experienced a similar avalanche.
The ‘true’ global effect of PE became more publicised and shamefully dramatic in the early 21st century. It began with the dot-com bubble bursting. This disaster has so far caused the maximum damage because it sent more than just tremors across the global financial market. It shook the very belief in Private Equity (and Venture Capitalism). In the quick years that followed this early 2000s disaster, more than half of PE firms that had invested their dimes and coffers in web start-ups were forced to throw in their towels. Of course, the market as a whole, and the investors were left at the mercy of no modern capitalistic gods. Many IT firms that had become bigger with the prime support of PE saw the cash and asset balance levels in their wells fall. Much below even the amount of capital initially invested! And the biggest reason for such an unwanted outcome was that those very PE firms that had promised to fuel their dreams ran out of fuel themselves. They backed out in the name of retreat and failed to live up to their investment commitments. By the end of the year 2000, globally, the count of PE firms fell by a horrific 50 per cent!
Obviously, India was not one to remain idle when it came to being mesmerised by this hypnotic trick and believing in the permanent magic of a volatile formula. It was one of those markets that felt the maximum impact of the dot-com bubble slap. The Indian IT industry came under huge pressures – returns vapourised for some time and much hope was lost. There are huge apprehensions still – that have spread to other verticals. Even today, every now and then, cases of insider trading and embezzlement are reported across various sectors. And we’re not even counting unrevealed scams yet. Private equity dealings in the first decade of the 21st century has left us in ruins. Worse, during this period, PE entered one sector after another and that resulted in excess supply being created. The bubble of a hope that PE generated ruined organisations far and wide – some temporarily and some forever – with excess pressure of expansion that has left them in a complete mess with visible supply-demand mismatch.
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