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Private Equity Funds in Sri Lanka

Private Equity: Putting “private equity cloths” on
Private equity in Sri Lanka can sometimes carry a number of misconceptions. One of such poorly visualized misconception is that private equity companies invest in high risk technology businesses only. Another attitude is that it is the exclusive paradigm of institutional investors or ultra high net worth individuals, and hence this is beyond the financial reach of the average retail investors. This is applicable to both Sri Lanka and the rest of the world.

The truth is however far way from these perceptions. In essence, private equity involves investing in companies that do not trade on a stock exchange. Broadly, this encompasses two main types of investment- Venture Capital (VC) and leveraged or management buy- outs.

Although VC focuses on technology- oriented, early- stage companies and therefore can entail higher risk, this is only one part of this industry. Buy outs, which focus on established companies with stable cash flows and span many industries, attract many private equity funds. Private equity has been delivering stable returns for several decades and is no longer viewed as high risk.

Public Equity Vs Private Equity
One of the main reasons why private equity funds outperform publicly held shares is that private equity houses are on the hands of investors. Private equity has been able to outperform public equities because they take an active involvement in their businesses. They actively engage in implementing change, expanding operations and cutting costs throughout the life of the investment. Also in most buy outs, management is given a stake in the company and this serves as a great motivation. Managers who own a big piece of action tend to perform better than those who have no equity. It is a huge incentive.

Further buy out companies can be financially engineered. Cash flows are leveraged up, allowing companies to take on more debt than many public companies or branches of large corporations. In a typical buyout, the private equity company takes a controlling interest in a company, it will provide approximately 30% of the acquisition price, with the rest raised in debts from banks and other debt providers, which will be applied to the company’s balance sheet. Private equity companies typically seek to exit their investment by selling or floating them after about five years although in good exit climate, this can be reduced to as little as three years.

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