Relationships between investment strategies of private equity firms and performance of Indian public companies

Abstract

Shareholder activism is the way through which shareholders declare their power as owners and affect the behavior of the company. Private equity firms use the same technique by acquiring voting rights in public companies to implement changes, create additional value for the portfolio company, and generate profits at the moment of exit. This technique is widely used in developed markets of the USA, UK, Germany. Nevertheless, developing markets, with greater growing rates, offer higher returns. Consequently, many investors switch to developing markets. The same is true for activists. India seems to be the best market due to high growth and more favorable conditions for doing business than China, for example. The goal of the research is to analyze relationships between different activism strategies and performance of portfolio Indian public companies. The paper answers three main questions. Does activism really present in Indian market? What are determinants of the choice for different investment strategies? Do different strategies of activism result in differences in performance of portfolio companies? The obtained results show that during the examined period 2001 – 2014 activists have failed in the attempts to generate profits through development of portfolio companies. Conventional passive investments outperformed active ones. The possible reasons for the failure are the lack of liquid exits for private equity firms and communicational problems between private equity firms’ managers and managers/promoters of portfolio companies.