In recent years, alternative investment asset classes, such as private equity, have become increasingly important pools of capital in the global financial system.
A few years ago, we read in the newspaper that an international private equity firm called Aureos Capital bought an equity stake in the Apollo Hospitals, Dhaka. There were some subsequent investments in retail, electronics, and pharma industries too.
A few private equity firms such as Terra Partners and Brummer & Partners have already made their mark in Bangladesh.
I am aware of few other private equity firms in UAE, India, and the US that have also made investments in Bangladesh’s e-commerce, apparel, and pharma companies.
Few others from Singapore and Hong Kong are also looking at large financial investment in Bangladeshi pharma and textiles companies.
Companies with strong governance, like Summit Power, got incorporated at Singapore and brought in private equity investment there against their Bangladesh held assets, as regulations are more favourable in the developed countries.
Private equity firms look for companies in which they believe they can unleash value. The private equity ownership structure is likely to foster a climate in which companies can do what is necessary to promote growth and profitability over the long run.
Private equity firms generally take a longer-term perspective on companies, and recognise that the end result can be either a favourable or a loss situation.
While private equity fund investment is a highly risky business and capital is likely to be locked in for long periods of time or even lost, a potential net return of as high as 40% compensates for the risk taken by successful funds.
Types of private equity investment
There are various types of private equity investments: Venture capital, leveraged buy-out (LBO), special situations etc.
Private equity firms seek capital from investors to put together the funds, and the fund managers of private equity funds also invest in their own vehicles, typically providing between 15% of the overall capital. Oftentimes, private equity fund managers will employ the services of external placement agents, in order to raise capital for their vehicles.
LBOs have generated a growing portion of private equity investments by value and increased their share of investments to more than two-thirds.
By contrast, the share of early stage or venture capital investment has declined in recent period.
The regional breakdown of private equity activity shows that North America accounted for 40% of global private equity investments and 52% of funds raised, Europe 43% share of investments and 38% funds raised.
On the other hand, Asia-Pacific’s share of investments is 11%, while its share of funds was at around 8%.
The role private equity firms play in improving performance of companies in all sectors increases productivity and competitiveness, and promotes an important governance innovation that is value-added in its own right
At a juncture
Most Bangladeshi large corporates are at a critical juncture to take their next big leap. With economic fundamentals improving, as well as the political environment, due to recent steps by the government, regulatory framework evolving, and open dialogues between private and public sectors taking place, this seems to be a good time for private equity investors to look out for opportunities.
Local companies that are being led by visionary entrepreneurs and are thriving to become big operators could seek private equity investments.
Developing a pragmatic business strategy, attracting new capital, and engaging creative managerial talents could potentially unleash the value of a corporate.
Reputed private equity firms additionally help improve the corporate governance level and prepare the company for public listing at a suitable time. While listing provides an exit for the private equity fund, it presents a better-run listed company in the stock exchanges.
Although dividend repatriation has always been fairly easy, capital repatriation for investors in Bangladesh has proven to be challenging in some cases in the past.
When these private equity funds come in with an investment tenure of five to 10 years in a market, they want the comfort of some certainty regarding the repatriation.
However, new regulations in Bangladesh have been more facilitative and have sorted out the issues related to valuation, which were shoe-pinching in the near past.
This will prove to be a blessing for the private corporations in Bangladesh.
Private equity has proven itself to be a powerful engine for creating economic value for investors, retirees, workers, and institutional investors.
The role private equity firms play in improving performance of companies in all sectors increases productivity and competitiveness, and promotes an important governance innovation that is value-added in its own right.
Private equity is not to be feared, it needs to be better understood, and a better operational framework needs to be developed for them so that opportunities are not mishandled.
In a country like Bangladesh, where there is an acute shortage of capital, management capability, and corporate governance, private equity firms can play a significant role in developing the market as well as local entrepreneurship.
Mamun Rashid is a banker and economic analyst.
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