Listen to this article
Private equity funds (PE funds) invest in growth stage companies, which are typically not listed in equity markets.
Every company goes through 5 stages – start up, angel investing, early stage venture capital, private equity and public listing through IPOs. PE funds invest in early stage venture capital and private equity.
As you can see, PE funds generally invest in already established company having a viable business model. These funds fall under Cat II AIFs.
PE funds are always closed ended in nature. Majority of these funds in India have 5+2 or 7+2 structure i.e. life cycle of fund is 5 year fund with 2 year extension. Globally, many of these funds have delivered Multiple on Invested Capital (MOIC) of 3x to 4x (In IRR terms, it would be close to 20% per annum).
Wealth managers recommend PE funds to wealthy investors having very high risk appetite.
Cafemutual spoke to industry experts to understand how wealth can choose private equity funds.
Lakshmi Iyer, CEO-Investment & Strategy, Kotak Alternate Asset Management feels that wealth managers should look at the track record of the fund manager and the sectoral bets. She also said that wealth managers should look at entry and exit strategy of the fund manager to understand the style of the PE fund.
Deepak Jaggi, Co-Founder and MD, Satco Wealth tells us that wealth managers should check for marquee investors in the fund of choice as it can give some idea about the quality of the fund. “One of the easiest ways to shortlist PE funds is by looking at who have invested in the fund. If there are some well known names, you may consider recommending them.”
Paresh Parikh, Head of Distribution, Ashmore( India) said that wealth managers should be mindful of fees charged by the PE funds. He said that higher fees especially the performance linked fees can eat into the net returns of the funds. He also believes that wealth managers should look at the investment philosophy and investment process of the asset management company and see if it suits client requirements.
Nalin Moniz, Chief Investment Officer, Alternative Equity at Edelweiss Global Asset Management believes that wealth advisors should check not only the experience of the fund manager but the entire team. He said, “Wealth managers should do homework on the entire team behind PE funds and check if the team brings expertise to the table. It could be in any form like sectoral expertise, business expertise and so on.”
A senior investment strategist believes that wealth advisors should look at the tenure of the fund. Secondly, they should look at the track record of the fund managers that includes the entry and exit track record and risk mitigation strategy.