PEs adding to the illiquidity of financial markets

Author: Neha Dhemija

Private Equity (PE) firms investments in Pre-IPO deals have become quite an order of the day during the times of sensitive index (Sensex) climbing a new high each day.
In a pre-IPO deal, PE firms invest in un-listed companies by buying shares at a discount. Once the company gets listed, the shares are sold at a premium. Gradually, organizations started doing several rounds of pre-IPO deals to raise funds. PE investors were also a happy lot as they used to have an ‘almost guaranteed return’.

However, the current downslide has caused these companies to come out of these prematurely. They are asking the promoters of the companies they invested in, to conduct buying out of the holdings.
	In some cases, to help PE firms, a break-clause was put in, according to which the promoters had to return the money if the IPO did not materialize. But the present unfavourable conditions have made everybody uninterested in such deals. The PE firms are holding back as their investments are no more ‘assured’ and companies in need of funds are delaying their projects. A major hurdle with this concept of investing in unlisted companies is that the shares cannot be traded the way a public-listed company’s can be. So, there are limited routes left for the PE player to come out un-harmed.