Over regulating the private equity market is harming genuine investors – Guardian Capital

Guardian Capital Partners

A Sri Lankan Equity investment firm says, the rule imposed by the SEC which locks in the private equity investors for a period of 9 months after an IPO, penalizes the genuine investors, who provide growth capital to companies, from exiting their positions once the firm goes public.

The equity firm, Guardian Capital Partners PLC says, typically in a private equity investment, at least a 3-5 year gestation period is needed by the companies from
the time of capital infusion to achieve the targeted growth.

It points out, in this situation, requiring private equity investors who have already taken a substantial risk during the initial growth period to be locked in for a further year reduces the attractiveness of the industry for those who participate in supplying this emerging source of risk capital to the local landscape.

The firm in its 2011 annual report says the law was primarily targeted at companies that launch IPOs within a few months of placing shares privately at a discount to the IPO price.

Firm’s Chairman Israel Paulraj observes that regulations are needed to protect investors and the integrity of the market, but warns over regulation is harmful.

“As it stands now, private equity investors would be locked in for a period of 9 months after an IPO; and where the placement has been done within the 12 months prior
to the IPO, the lock in would be extended up to 1 year” added Guardian Capital in its 2011 annual report.

“We would also like to note that in other emerging markets, such lock-in periods commence from the date of the allotment of private placement shares, in line with the
regulation that was in force previously in Sri Lanka, where PE investors were locked in for a year from the share allotment date” added Israel Paulraj, in his statement published in the annual report.

Guardian Capital Partners PLC which has completed the first full year of operations as a specialized private equity investment vehicle during the year 2011, says as of the end of the last financial year, the company was holding a total portfolio of Rs. 522.2 million.