Private equity in developing nations

Abstract

Information about private transactions is often limited; hence, analysing their developments in the emerging markets becomes more difficult. The paper tries to establish a threefold relationship. It examines the importance of emerging markets in the global context within the realm of the BRIC economies, the role of capital market in the overall development of an economy and the relevance of private equity (PE) in boosting a country's capital market. It examines the various reasons for the PE market's explosive growth over the past 15 years in a phased manner and highlights the main characteristics of that growth. The paper aims to understand in a comprehensive manner the importance of PE investments in boosting the size of a nation's capital market and its overall impact in the context of developing nations, with an added focus on India. The paper draws the data primarily from trade journals.

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Notes

  1. 1.

    The rest of the paper uses the term emerging and developing interchangeably.

  2. 2.

    IMF's method of converting national GDPs into dollars using purchasing power parities (PPPs) instead of market exchange rates takes account of international differences in prices of the same goods and services to provide a more accurate measure of the purchasing power of each country's inhabitants.

  3. 3.

    GDP refers to the monetary value of all the finished goods and services produced within a country's borders in a specific time period, usually calculated on an annual basis. It includes all private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

  4. 4.

    Some studies have been made of particular sectors of the market, such as venture capital and leveraged buyouts of large public companies. For studies on venture capital.

  5. 5.

    Among the important organisations that formed first-time partnerships in 1969 were TA Associates (Advent I), Patricof and Company (Decahedron Partners), the Mayfield Fund (Mayfield I) and the Sprout Group (Sprout I). See Stan Pratt, ‘The Long Road From 1969: A 25 Year Rollercoaster,’ Venture Capital Journal, December 1994.

  6. 6.

    The National Venture Capital Association (NVCA) is a trade association that represents the US venture capital industry. It is a member-based organisation, which consists of venture capital firms that manage pools of risk equity capital designated to be invested in high-growth companies. www.nvca.org.

  7. 7.

    Data from Emerging Market Private Equity Association, Emerging Market Private Equity 2006 Fundraising Review, March 2007, accessed via www.empea.net, 24th July, 2007.

  8. 8.

    Brady bonds were created in March 1989 in order to convert bonds issued by mostly Latin American countries into a variety or ‘menu’ of new bonds after many of those countries defaulted on their debt in the 1980s.

  9. 9.

    The Argentine Fiscal Crisis between 1999 and 2002 and its predecessor, the Asian Financial Crisis in 1997.

  10. 10.

    A Green Shoe, also known by its legal title as an ‘overallotment option’ (the only way it can be referred to in a prospectus), gives underwriters the right to sell additional shares in a registered securities offering if demand for the securities is in excess of the original amount offered. The Green Shoe can vary in size up to 15 per cent of the original number of shares offered, www.wikipedia.com.

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Further Reading

  1. China regulations: Draft rules on IPO's’, EIU Viewswire, 28th September, 2006, p. n/a.

  2. EIU ‘China Finance: Sub-Board of Shenzhen Stock Exchange Created for SMEs’, EIU Viewswire, 25th May, 2004, p. n/a.

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  4. Goldman Sachs:Dreaming with BRICs: The Path to 2050, (2003).

  5. Goldman Sachs Investment Bank (2003) ‘Dreaming with BRICs: The Path to 2050. Global Economic paper no: 99, October 2003, Dominic Wilson, Roopa Purushottaman.

  6. Grant Thornton International Business Report emerging markets (BRIC) focus.

  7. Hardymon, P. and Leamon, A. (2007) Motilal Oswal Financial Services: An IPO in India, HBS Case No. 807-903, Harvard Business School Publishing, Boston, p. 3.

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  8. Hardymon, P. and Leamon, A. Gobi Partners: Raising Fund II: HBS Case No. 807-903, Harvard Business School Publishing, Boston, pp. 2–5.

  9. Heakal, R. (2003) ‘What is an Emerging Market Economy’, Investopedia, 30th July, 2003.

  10. Klemann, J. Emerging Markets and Economic Geography: Economic Growth Around The World’, www.escapeartist.com.

  11. Latin American Private Equity Review & Outlook 2000/2001; 2001 Guide to Venture Capital in Asia; European Equity Investment Funds: Public–Private Partnership Experience, 1999 and IFC documents (Annual Report, 2000).

  12. Mohamed, T. (2002) ‘Finance and Growth: Empirical Evidence from Developing Countries’, University of Montreal Working Paper.

  13. The Economist (2006a) ‘Emerging Economies Climbing Back’, 19th January, 2006.

  14. The Economist (2006b) ‘Emerging Economies Coming of Age’, 19th January, 2006.

  15. The Economist Intelligence Unit (2001) ‘EUI Country Profile 2001: China’, http://lib.harvard.edu2713/report.dl.asp?mode=pdf&valname=CTBCNC p. 15, accessed 2nd April, 2002.

  16. Venture Economics (1994b) ‘Venture Capital Association European Private Equity Statistics’, Venture Source; OPIC (James C. Brenner, Director).

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Correspondence to Arindam Banerjee.

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Banerjee, A. Private equity in developing nations. J Asset Manag 9, 158–170 (2008). https://doi.org/10.1057/jam.2008.12

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Keywords

  • private equity
  • BRIC economies
  • American Research and Development Corporation
  • venture capital
  • buyouts