What is Private Equity Investment
In India, the investment in the company or money raised in the company is done either by public equity or by private equity. Public equity refers to equity raised by a company through issuing shares in the public market also known as an initial public offering or IPO, whereas Private equity (PE) investment is a type of investment in which the investor purchases a share in privately-held businesses. In this article, we will deep dive into the topic and learn more about PE investment.
What is PE investment?
Private equity (PE) investments involve investors pooling their funds to acquire ownership in private companies or invest in the equity of companies that are not publicly traded. PE investment is done by Private equity firms, which usually target companies with high growth potential, successful history of generating revenue and profit and that require additional resources, strategic guidance, or operational improvements to achieve their full potential.
They participate actively in the management of the company by working closely with them and implementing changes that can unlock the full potential of the company.
Private equity has become a popular way for entrepreneurs and investors in India to achieve their goals and growth and access capital.
Private equity investors typically remain invested in their portfolio companies for at least 10 years during which they carefully consider and plan their exit option.
Overall, private equity investment involves a long-term commitment to identify and nurture companies with the potential for growth and profitability to achieve a successful exit strategy that benefits the investor and company.
Participants in the PE fund
- General partner: the general partners are responsible for managing the fund, which includes raising capital from limited partners, identifying investment opportunities and managing the portfolio of investment. They receive management fees and a portion of profits earned by the fund
- Limited partner: Limited partners are the investors who provide the capital for the fund which is typically made of institutional investors like pension funds, endowments, funds, insurance, company, etc. They receive a return on their investment in the form of a share of the profit earned by the fund after the general partner receives their share.
Types of Private Equity Investments in India
- Growth Capital: this involves providing capital to companies that have an established business model and are looking to expand their operation into new markets or launch new products.
- Buyout: in a buyout, the private equity firm acquires a controlling stake in a company and takes over its operations, to improve its performance and profitability.
- Venture Capital: venture capital investments are typically made in early-stage companies that have promising business ideas, but are yet to generate significant revenues.
- Distressed Assets: in this type of investment, the private equity firm acquires distressed assets such as non-performing loans to turn them around and realise a profit.
- Mezzanine Financing: Mezzanine financing is a hybrid form of debt and equity financing, where the private equity firm provides a company with the capital that is structured like debt but has an equity like return.
- Infrastructure financing: This involves investing in infrastructure projects, such as power plants, airports and highways with the aim of generating stable long-term returns.
Benefits of PE investment
- Private equity investment adds working capital to the business as raising money in newly started business is not easy, so private equity firms bring cash and solve the problem of cash crunch and helps in smooth running of the business.
- Private equity is an unconventional way of funding where the PE firm invests their money for the overall growth and development of the company.
- Private equity investment is better than raising loan or debt financing as they save the company from paying more compound interest months after months and a huge late fees penalty if the company misses the monthly instalment.
- PE investment not only brings monetary incentives but also, mentorship and expertise with it. This hands on hand approach can lead to better operational performance, improve governance and increase shareholder value.
- PE firms and investors stay at the foreshore of new technologies and they support businesses to build technology leadership.
Challenges in PE Investment
- One of the major challenges in private equity investment is the lack of transparency and accountability in some sectors which make it difficult for private equity firms to evaluate investment opportunities.
- There is also a shortage of experienced and skill management teams which can make it difficult for private equity firms to implement the changes necessary to improve the performances of their portfolio companies.
Private equity investment in India is expected to experience continued growth and contribute significantly to the country’s economic development as the industry evolves and adapts to the changing landscape. Private equity firms will need to continue to innovate and stay competitive to meet the evolving needs of the market. These firms will play an important role in providing capital to companies seeking to expand their operation and take advantage of new market opportunities.
Frequently asked questions (FAQ)
What are some of the risks associated with investing in private equity in India?
The risks associated with investing in private equity in India include the potential for investment losses, lack of liquidity and regulatory risk.
What is the time limit for investment for private equity investments in India?
Private equity investment in India can range from 5 to 10 years with an aim to exit the investment through a sale or IPO.
Taxation of private equity investment in India?
Taxation of private equity investment in India depends upon the various factors such as taxation of limited partners, general partners, portfolio companies, double taxation, structuring etc