What is private equity investment?
Private equity investment refers to investing in private limited companies i.e. companies that are not listed in stock exchanges. The investment tenure in private equity is usually quite long e.g. 5 to 10 years. The minimum investment in private equity is usually quite large. As an asset class, private equity is suited for high net worth investors (HNIs), ultra high net worth investors (UHNI), Corporates and Institutional Investors. Usually private equity investments are made in company which is one step away from Initial Public Offering (IPO). However, these investments can also be made at an earlier stage of a company's growth. However, private equity investments are not usually made in very early stage ventures.
How does a private equity fund work?
Private equity (PE) funds are pooled funds like mutual funds or Portfolio Management Services (PMS). However, the number of investors in a private equity is much smaller compared to MFs or PMS. The fund is managed by investment professionals known as General Partners (GP). The investors will participate in the PE fund as Limited Partners (LP). The GP will look for investment opportunities in private companies with high revenue growth prospects and strong profit margins. Such companies may look for capital infusion to fund the next stage of growth, increase business scalability to multiply revenues and profits. Private equity investors look for very high returns on investment, usually multiples of growth e.g. 10 or 15 times growth of their investment. Exit opportunities (redemption or sale) are discussed with the promoters of the company at the time of investment. Exit is usually through IPO or through strategic sale to a company who wants to acquire a stake in the company - majority or minority stake.
Who should invest in Private Equity?
Private Equity investments can give you much higher investments than traditional equity investments i.e. stocks or mutual funds, as mentioned earlier, returns of Private Equity investments is usually in terms of multiples e.g. 10X, 20X etc. However, private equity investment is usually for investors with very high risk appetites and very long investment tenures. You should also have sufficient knowledge of the industry and business model of the investee company; you should work with a financial advisor who has knowledge of the industry and business. The liquidity of private equity investments is very low; you need to wait till the planned exit either through IPO or strategic sale. Private equity investments is not for your usual life-stage financial goals e.g. children's education, children's marriage, retirement planning etc. Your core portfolio should tak care your life-stage goals. Private equity is purely for wealth creation
How to invest in Private Equity?
As per Bain Consulting report, private equity investments in India exceeded $60 billion in 2022. Most of the private equity investments are from institutional investors. In recent years, there is growing interest in Private Equity from HNI / UHNI investors. There are several ways of investing in Private Equity. You can become an LP in PE fund. Alternatively, you can invest in Alternative Investment Funds (AIF), which in turn in invest in private equity, venture capital, pre IPO opportunities.