What plagues the private equity space? Experts answer

Here is a verbatim transcript of the exclusive interview with Luis Miranda and Anil Ahuja on CNBC-TV18. Also see the accompanying video.

Q: Let us take a quick assessment of where we stand today in the private equity industry - what's looking good, what's not looking good. Have valuations run up steeply or is that only a concern for those private equity firms that are actually are investing in public markets?

Miranda: Today is lot like in the old western move, 'The Good, the Bad and the Ugly'. There are some good parts, there are some bad parts and there are very ugly parts. The good part is that on the exit side, things look good because there is sort of lot more interest in IPOs at this stage and that's good for us. Some of our companies are doing well. The bad part is that valuation for us to do new deals is still a challenge.

And it is a challenge because valuations haven't sort of come down the way we would like to see in the promoters, family-owned businesses etc where we are still seeing valuations at different levels. The ugly part is that because of what happened in the last 18-months, some companies are hurt and therefore there is a lot more work involved and the companies which are hurt the most are the ones which were - in our portfolio at least - focused on the external markets either because the global market - the customers dried up or trade volumes came down that were impacted.

But by and large, it is not as bad as what it was at the beginning of the year despite this un-seasonal rain, there is still some sunshine out over there.

Q: Anil?

Ahuja: I agree with Luis but valuations have been a moving target, which has moved very rapidly over the last 12-months. In fact, we used to joke that in the beginning of the year no deals were happening because no issuers would issue paper at that price and no deals are happening because no investor wants to buy paper at this price. So the other problem that we have is that our public market and our private market is intertwined quite severely and all deals that happened in the private market are essentially using benchmarks or comparables of the public market. And when the public market goes from 8,000 to 17,000 - there is no question that investors - like ourselves - are going to have a very tough time trying to get to grips with these valuations.

Q: We have come out of two really tough years. I am not sure whether we have fully come out as yet or not but there has been a lot of talk on the kind of impact this has had on the fund industry. I'll say the fund industry because in the last year or year-and-half ago, the lines had blurred between what kind of investments hedge funds were making or private equity funds or venture capital - anyone who had cash - was putting it wherever they could. Have those lines sort of de-blurred for now at least and is it looking better? What about talk of funds actually being up for sale?

Miranda: Two things. I think limited partners (LPs) are going to be asking the tougher questions - how have you made the money and how we have managed it as opposed to just looking at what returns are made. So, that's going to sort of help define - reduce the blur between various sort of businesses. I don't know whether they are going to be funds which are available for sale. I have not heard about them but clearly there are going to be some funds who will never raise another fund again. That's going to be tough for them. There have already been some funds where investors have come back and said that, "We won't put in more capital. We are going to cap the commitments made and we are not going to put in more money."

That's the tough situation people are in today. People are talking about governance, people are talking about track records and this is in addition to the fact that a lot of LPs out over there in the west who are struggling for liquidity themselves. So it is going to be difficult not just from the way general partners (GPs) have performed but also from the fact that LPs have less cash possibly to put into private equity.   

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