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India is dubbed as a start-up nation, a country vibrant with start-ups with varying business models and spanning across a huge genre. It is ranked as the 3rd largest start-up ecosystem in the world. There has been a consistent 12%-15% growth annually in the number of start-ups over the past few years. On the backdrop of this, it comes as no surprise that Private Equity (PE) investing is fast catching the fancy of many investors. Private equity investing in India can be accessed via the alternate funding route. Here we understand the nuances of this investment vehicle to help you make an informed decision.
Private companies' equity investments are called private equity; this type of investment is available to a select audience. The equity of private companies, as evident from the name, is not traded on the exchange. However, they are regulated by SEBI (Securities Exchange Board of India). Typically, the tenure for investment in private equity funds is ~ 10 years, and the minimum investment is typically extremely large, thereby restricting the audience to HNIs (high net worth individuals), UHNIs (Ultra high net worth individuals and institutional investors. These funds are generally pegged as alternative investment funds (AIFs). The private equity investments are made in companies which are already on a growth trajectory and are just one step away from going IPO.
A group of investors or a firm with like-minded people pool funds to form a private equity fund. The fund is then invested in a single company or group of companies, depending on the quantum of funds raised. The basis for investment in those companies is the future outlook for growth. Private equity investors inject capital into companies which have the potential to expand their business and generate consistent revenue growth over the long haul. The private equity investors stay invested for a period not less than 10 years, and their exit options are discussed at the time of investment. There are many instances where the capital infusion is into companies which are financially distressed but show potential for future growth. The PE investor can make an exit when the company overturns their fortune, and substantial returns are generated.
Investors in private equity firms have to do so after adjudging if they want to be passive investors, who let the management of the company (in which they have invested) conduct the business and generate optimal returns or active investors who, in turn, provide operational support and give strategic guidance to ensure that the business growth is along the desired lines. Active PE or private equity firms often maintain relationships with C-level management like CEOs and CFOs for the company’s growth.
As per the report by EY, over $230 billion of funds have been invested in PE and the venture capital market in India. Despite the pandemic, there was substantial investment in promising private equity opportunities. India continues to be the land for emerging businesses. The Government has undertaken many initiatives such as ‘Make in India’, which encourages the start-up ecosystem. PE investing has increased in a few sectors, specifically IT / ITES, Telecom, Energy, Financial Services, Digital payments, Airports, etc.
Private equity can add a new dimension to your existing portfolio, if you are willing to undertake high risk to earn high return. Private equity investments come with an inherent lock-in and are typically invested with a long-term view. The quantum of funds required for investment in Private Equity is quite high and hence, is a niche investment particularly aimed at the HNI community. Suppose you have attained reasonable knowledge about the workings of public equity and understand the risks appropriately. In that case, you may consider investing in private equity via the AIF route, which is relatively safer. These funds are managed by qualified experts who conduct very intense research before placing their bet on any private equity investment. Private equity as an investment option should be looked into only after you have taken care of your financial goals and are investing for potential upside.
Having understood the details of private equity, it is apparent that it offers the potential for higher returns. However, this comes with higher risk as well. This note is only a preamble. You may have to research intricately to ensure you make an informed decision whilst investing. Reach out to financial counsellors at TATA Capital Wealth, who can help you evaluate the suitability of PE investments in your portfolio.
Policies, Codes & Other Documents