An investor’s approach to Private Equity


An investor’s approach to Private Equity.

Private Equity around us:

Many of us may still be of the view that Private equity is an alien concept, there are not many roles of private equity in Indian companies. In reality, companies that are backed by private equity are all around us, from Zomato for food delivery to BYJU for your child’s education, from Flipkart for your online shopping to Big Bazaar for basic supplies, all these have been funded by private equity at some point or the other. Not only that most of the startups with fair valuations that turn into a unicorn get the support of private equity funding from time to time.

What exactly is Private Equity?

Private equity is essentially a collection of funds, sourced from institutional investors, high net individuals, and private equity firms. To put it in simple terms, Private equity is similar in many terms to Mutual funds or even Hedge funds for that matter, as long as the pooling of funds is concerned. The difference is in the approach of how private equity utilizes these funds. Private Equity generally invests in the companies for a longer time frame and typically tries to support the company to reach its potential and eventually launch an IPO, which generally marks the exit for the PE.

Oh, okay so this looks quite interesting.

How can I Invest? Who is allowed to invest in Private Equity in India?

As per SEBI regulations, Private equity investments are restricted to qualified investors. These qualified investors can be categorized as High net worth Individuals/Ultra High Net Worth Individuals, Institutional Investors, and Private equity firms. Typically, different private equity firms further restrict their minimum investment ticket size as per their criteria.

For an eligible Investor what are the steps to be taken before investment:

Step 1: Check your eligibility

Private equity investment is a similar sort of investment as compared to other pooled forms, but there is a well-defined criterion by the regulators of who can be an Investor in private equity. Apart from that various private equity firms restrict investment with minimum ticket size. Depending upon all these factors an individual’s eligibility to invest in private equity can be determined and sorted into fitting firms.

Step 2: Understand different Private equity strategies

Private equity firms have different strategies of working, it can be supporting an enterprise to build the business and later on launch an IPO. Another approach to Private equity investment can be buying out a company and building it to sell it out to a larger firm. Different firms have different approaches and comfort levels, many firms might be doing a healthy mix of different strategies. It is dependent upon the analytical framework of the PE firm. After a careful examination of these factors and an individual comfort level, he/she may zero upon the suitable option.

Step 3: Choose your comfort with different sectors

Private equity firms are typically sector agnostic, which implies that they deal with all the sectors. Sometimes they clearly define their area of expertise as well. But even when the private equity firms define themselves as sector agnostic, there always be a few sectors where these firms perform exceptionally and some sectors where they do not do as well. Depending upon the expertise of the PE firms should be chosen, that have specialization in the sector where the investor also has conviction.

Step 4: What is the investment mechanism

Whether as an investor you are willing to commit a fund or you want to align yourself with the deal to deal basis investment firm, that looks for investors based on the present opportunity rather than calling for committed capital. The comfort level of the investor with capital participation determines the suitable private equity firm for investment.

Step 5: Understand the fee Structure

Like with any other investment avenue, when an investor looks for starting an investment with a private equity firm, one of the important factors concerning the choice of private equity firm is the commission rate employed. In general, private equity charges a fixed percentage of capital as the management fee, and another percentage is charged on the return generated. A suitable combination of the above with your criteria helps you choose the right partner.

After careful examination of the above points is done. An investor generally comes to a reduced list of investment options. A critical examination of these with past performance, the reputation of managers, and funds with Private equity need to be performed. All is done and…..

Voila, you have your PE Partner.

Note: A retail investor may not be able to access details that easily, still a considerable amount of research can be done via CrunchBase and MCA websites.

Ending Note

The regulation in the private equity space is going through changes, as an Investor, it might be difficult to keep track of it all the time. To keep yourself apprised with the latest development follow us on linked in here or subscribe to our newsletter. If you want to know about investment opportunities with us, click here.