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Value of private equity investments dipped 60-70 per cent, says Indian brokerage

The value of investments made by private equity firms in 2007 were eroded by 60-70 per cent, or nearly USD2.25bn, over the past few months amid turbulent economic conditions and falling

The value of investments made by private equity firms in 2007 were eroded by 60-70 per cent, or nearly USD2.25bn, over the past few months amid turbulent economic conditions and falling stock markets, a study says.

Of the 63 deals involving private equity investment in 2007, 92 per cent or 53 deals saw the investments losing value, according to the report by SMC Capital.

‘Private equity firms lost about 60-70 per cent of their investment-worth with the capital markets losing steam and economic conditions worsening,’ says Jagannadham Thunuguntla, head of the capital markets arm and director of SMC Capital. ‘Continuous downfall and rough market conditions were the primary reasons for this huge capital erosion.’

The overall return on investment in public companies reflects a loss of USD2.24bn on a total investment of USD5.29bn made in 2007.

Current valuations of private investments in these companies stand at USD3.05bn, says the SMC Capital report.

Of the total investments across nine industries surveyed by the firm, only one – telecom – proved lucrative with capital invested appreciating 9.6 per cent over the past year. About USD1.3bn invested in the telecom industry rose to USD1.42bn by December.

The other eight industries turned out to be wealth destroyers and among them retail investments took the hardest hit, losing 91.43 per cent of their value.

‘Losses have been all-pervasive, which shows that these companies were over-valued when the bull market frenzy was on,’ adds Thunuguntla.

IT and IT-enabled services, real estate, media and manufacturing were some of the other sectors that turned out to be poor investment avenues. Of these, the first two were the worst performers, with all 15 investments made in these two sectors performing badly.

Private equity firms bought into these companies at high valuations in 2007 but lost out during the course of 2008 owing to destructive market conditions, with only five deals yielding profits.

The report suggests there might be more bad news in store for private equity firms if the liquidity crunch in global markets does not ease up.

‘Firms which are owned by banks and other financial institutions may be forced to sell at a loss if their parent entity is faced with a cash crunch,’ Thunuguntla says.

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