Private equity is a type of equity financing. Classified as category II AIF by SEBI, private equity funds invest in companies with the aim of exiting them later for profit.
Globally, private equity firms take majority ownership of the companies in which they invest. Broadly they invest in two categories of companies
- Ailing companies: Here the aim is to turnaround the business by making a change in operations and then selling the company at a profit. At times, private equity firm may take ownership of the stressed firm and make profit by asset sale
- Mature companies with potential for higher growth: Popularly known as leveraged buyout, here the private equity funds completely buys a company with the intention of improving its profitability and then reselling it at a higher price in an IPO or to other investors
According to news reports, in the past five years, deals in which private equity funds took control of the business grew at an annual average rate of 50% to $9.9 billion in 2018. In comparison, overall private equity investments grew at an annual average pace of 25% to $35.8 billion in 2018.
PE funds may invest in either privately held companies or publicly traded companies. However, when they invest in publicly traded companies, many a times, the intention is to make the company private. Typically, private equity funds invest in a few companies; however, the quantum of investment in each company is high.
Investment holding period in a private equity funds tends to be high. As the focus is on turning around the business, it may take 6-10 years for the private equity firm to make the business profitable and attractive for strategic buyers. Alternatively, private equity firm may choose to exit via an IPO; however, in that case, the liquidity conditions in IPO become crucial. Recent news report share that close to two dozen private equity firms are awaiting the revival of Indian IPO to exit some of their investments.
Multiples Private Equity, True North and Faering Capital are some boutique private equity firms that have launched private equity funds in India. A crossover of private equity funds, which has emerged in India recently is pre IPO / IPO funds which invest in businesses due for listing. IIFL and Edelweiss are firms which have spearheaded this space.
As the minimum investment size in private equity funds is Rs. 1 crore and these funds may have a long holding period you can recommend these funds to your wealthy clients who do not have near term cash flow requirements. Along with HNIs and UHNIs you can recommend these funds to institutional clients.