What is Private Equity Investment?
Private Equity refers to shares of a company that represents its ownership. An individual who wants to take partial ownership of a company can make a private equity investment in that particular firm. These companies are not listed or traded on any stock exchange.
Generally, high net worth individuals and institutional investors invest in equity of new or established companies which have a high growth and return potential in the future. Companies with sound business models, strong leadership and management base, and valuable client relationships attract these investors.
Many startups or struggling companies in India have changed their source of capital infusion with private equity becoming the preferred source of funding. If one takes up considerable equity ownership, s/he might get controlling rights of the company, which includes a significant role in management and business development of the firm.
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What are Private Equity (PE) Funds?
Private Equity Funds basically invest in unlisted private companies and take a share of their ownership. Unlisted private companies that find it difficult to tap capital through the issuance of equity or debt instrument, or venture capitalists, look out for PE Funds.
Further, these companies present its investors a diversified portfolio of equities which essentially, lowers the risk to the investor. A PE Fund typically has a fixed investment horizon ranging from 4 to 7 years. After 7 years, the firm where the money was invested expects that it would be able to exit the investment with a good amount of profit.
Difference between Private Equity & Venture Capital
Many a times, people tend to confuse Private Equity Investment and Venture Capital as both include investment in firms to earn high returns in the future. However, there are numerous differences between the two.
- Startups and Established Companies
Venture capitalists invest predominantly in startups that have a high growth potential whereas private equity investors prefer both startups as well as mature companies that seek funds to improve their performance.
- Cash And Debt Investment
Venture capitalists only invest in equity of the new firms which have a significant scope for growth. Whereas private equity investment is done via equity and debt securities released by the company.
- Type of Funding
Private equity includes only financial funding, on the other hand, venture capitalists may help a firm via financial funding as well as knowledge transfer, technology transfer, etc.
Who Should Invest in Private Equity (PE)?
Private Equity Investment is on the rise in recent years, with tremendous growth potential shown by startups. Established companies also turn to PE Investment for fresh infusion of capital to finance their stalled projects.
High Net Worth Investors who have a high risk appetite should consider Private Equity to earn high return on investment. A thorough analysis of the company and its business model should be done, taking into consideration its past performance and managerial expertise, before investing in it.
Since the investment is made for a long tenure, an investor should keep some liquid cash for emergencies. Exit from Private Equity Investment can be quite cumbersome and time-consuming at times, which calls for a lot of patience if one wants to capitalize on the high returns opportunities.
How does a Private Equity Investment Work?
Here is a guideline which needs to be followed by investors/firms who choose to invest in private equity of a company:
- Raising Capital & Purchasing Shares: The extensive process of PE investment begins with mapping out an acquisition plan, and how the capital for the same will be sourced. This includes decisions based on various types of financing used to raise capital, etc. After the acquisition deal is completed, the management of the acquired firm falls into the hands of private equity investors.
- Restructuring the Acquired company: After the acquisition process is finished, the next step is to restructure the firm in order to enhance its productivity. This includes taking crucial decisions on the business operations and business expansion of the company, its growth model and profitability.
- Putting the Company on Sale: As soon as the acquired company starts profiting, and is showing consistent growth, the time is right to put it up for sale. If the company has been performing well for a long time, there is a high probability that the promoters will make humongous profits on the sale of the company. Post selling the firm, the private equity investors get their share of profits, and the investment comes a full circle.