A Private Equity Fund, also known as Private Equity, is equity capital which comprises of investors who invest directly in private companies. This equity capital is not listed on the stock exchange and usually follows a general investment criteria of investing in varied industries or follow a industry specific criteria. Considering that holding periods for private equity funds are long, therefore, private equity capital is raised from institutional and retail investors who can afford to invest large sums of money for longer time periods. This capital can further be utilized for large scale purposes like making acquisitions, expansion of working capital within an owned company, funding of new technology, to strengthen the company’s balance sheet, etc. the investing term for these funds can be anywhere between 10 to 13 years, after the expiry of which the fund is closed and the funds are returned back to the partners.
Private Equity Funds function on the following investment ideas:
Venture Capital – Private Equity capital can be used to fund the companies which are still in the initial stages of formation and do not have access to traditional financing means or to financial markets.
Growth Capital – Private Equity Funds can be used to finance expansion activities of a recognized private company which is short of required assets, as a result of which , it is not in a position to use its existing assets to avail conventional means of financing required for growth.
Leveraged Or Management Buyouts – Private Equity Funds are used along with additional leverage which is placed on the organization so that the existing management can work towards the target.
Turnaround / Distress Situations – Private Equity Capital can serve as an important source of funding when the company is not able to overcome its existing debt. In this case, the fund capital can be used to stabilize the company’s balance sheet, along with the help of turnaround strategies conducted by the management.
What is Private Equity driven by?
- Raising capital - A firm or a company agrees to sell some of its shares to private equity firms due to many reasons. One reason is, the firm may require a high capital inflow for long-term to run its business. Therefore, instead of waiting for a long duration to gather enough capital, it may opt to sell a part of its shares.
- Increasing regulation of public markets - Public shareholdings are controlled by a lot of regulations and hence, companies prefer to take the private equity route to finance their business operations.
- Funding the private equity boom - Private equity has been one of the most profitable trends in recent times and this segment is strengthened by the financial companies who structure the private equity deals. These financial companies leverage the expertise of underwriters like investment banks to ensure that the private equity segment remains profitable.
Advantages of Investing in Private Equity Funds
Some of the notable advantages of investing in a Private Equity Fund are:
Untapped Potential – The arena of potential company investments for private equity a vastly uncharted and untapped territory. There are several option looming in the horizon, from unlisted privately owned companies which have just begun expanding, unpopular divisions of larger organizations or even companies which aren’t doing well on the stock market and make them private.
Stringent Company Selection Process – Firms which handle private equity investments are highly selective and spend a considerable amount of resources to assess the potential companies which they could invest in. This also involves an understanding of the risks involved and how to ease the same. From scores of potential companies, managers can be highly selective and choose one company which possesses all the required characteristics.
Clear Accountability – Management teams of private equity owned companies are accountable to an engaged professional shareholder who has the right to protect their shareholding and act accordingly.
Private Equity in India
During the past 13 years, around $100 billion of capital has been injected by private equity in India. Many companies have been able to take advantage of this vital funding source. The private equity segment has also played a crucial role in the growth and development of many small and medium-size enterprises. It has also stimulated employment opportunities in the country and aided the progress of strategic capabilities.
In 2017 itself, there was an inflow of private equity capital of around $26.5 billion and the momentum is expected to continue in the coming years as well.
GST rate of 18% applicable for all financial services effective July 1, 2017.