What is Private Equity?
Private equity (PE) is a form of investment where capital is invested in private companies that are not listed on the stock exchange and do not trade publicly. As they are not traded on stock exchanges, the investment is not completely regulated. Private equity is the direct investment in companies that require significant capital outlay.
It comprises High Networth Investors (HNIs) and institutional investors such as large private equity firms. They can purchase stakes in private companies or control operations of public companies intended to delist them. The stakes in a public company make it delisted from stock exchanges.
A private equity firm is named a general partner (GP), and its investors (pension funds, institutional investors and HNIs) are called limited partners (LPs).
Partners at private equity firms manage the raised funds to yield high returns for shareholders. They utilise funds to restructure a distressed company, acquisitions and invest in start-ups. Investment banks, also named private equity funds, compete with private equity firms to buy fundamentally strong companies and finance young ones.
Investing Methods to Private Equities
Since private equities do not trade on stock exchanges, private equity funding involves the following methods:
- Leveraged Buyouts
This type of trading is the most common form of private equity funding and involves buying a company completely by putting up a fraction of the purchase price. The aim is to improve its business and then resell it to an interested party. They can opt to conduct an IPO also. A private equity firm identifies a potential company and puts together a special purpose vehicle (SPV). The strategies used by private equity firms include reducing employee numbers and replacing the management.
- Distressed Funding
Distressed funding involves investing in sick companies with underperforming businesses. The funding is done to turn the business around by changing their management or selling off their assets for a profit. Assets can range from machinery, land, and building to intellectual property rights. Its other name is vulture financing.
- Fund of funds
A private equity fund of funds is primarily aimed at investing in other funds. It acts like a Limited Partner for PE firms that raises capital from institutional investors and HNIs to invest in specific PE firms. These are primarily hedge funds. They offer an entry to small investors who do not intend to take higher risks.
- Venture Capital
Venture capital investing refers to offering initial funding to young companies looking to build their businesses. It may involve seed financing to build an idea or early-stage financing to help entrepreneurs in growing their companies. Private-equity firms add value to such young companies by guiding their inexperienced management.
- Specialised Limited Partnerships
The Special Limited Partner has a limited obligation to the private equity fund. It is a private equity firm that builds funds for investing in specific types of assets. Real estate is one of such assets. It may be an investment in commercial locations, apartments, or infrastructure projects like roadways and bridges.
- Angel Investing
These investors are experienced entrepreneurs or wealthy professionals who invest in start-ups and new businesses in exchange for part-ownership. This is a part of seed financing. It is a risky business that requires a high level of expertise in the industry besides colossal involvement.
Angels generally makes an investment at seed stage which is the highest level of risk. However. Highest returns comes with highest risk
Private equity crowdfunding deals with a business using an online platform to raise money from several individuals. Private equity crowd funders attain part ownership in the company. A sizable amount of money can be raised as the funds are from numerous investors.
- Private equity Exchange Traded Funds (ETF)
Private equity ETFs invest in financially complicated companies using leverage. It is typically a less volatile asset class with the potential of providing significant returns. Private equity ETFs offer portfolio diversification with various strategies to acquire equity stakes or debt positions.
Private equity is often a luxury that few can access. RURASH Financials help investors to gain access to private equity. Along with catering to the HNI population, we also offer private equity services to our retail clients.
Advantages of Private Equity
- Addition of working capital
Private equity helps to raise required funds to support a new or an old business in a struggling phase. It provides the necessary fund infusion to carry out business.
- Non-conventional financing methods
Companies funded by private equity do not have to approach financial institutions or avail of loans to support their business.
- Growth without restrictions
As it does not involve the traditional method of raising funds, companies funded by private equity can try new ways to run their business. It gives them the freedom to experiment.
Private equity firms guide the company. They are seasoned professionals who know the business and help in making a decision in favour of the business.
How Private Equity Works
Private equity firms usually offer long-term investments in companies with high-growth potential. They earn in the form of management and performance fees from investors in a fund. A private equity firm follows this ecosystem:
1. FundRaising – Private equity investors raise capital to form a private equity fund. Once this capital is raised, the fund will be closed for new investors.
2. Due diligence –The private equity fund manager then thoroughly researches on potential private companies for growth. It involves massive filtration based on a significant amount of resources.
3. Improved business efficiency – This is probably the most crucial step. A private equity firm aims to improve efficiency, increase fund flow, bring down costs, and grow the business. Therefore, they sometimes act as a business partner.
4. Selling the portfolio – The final step is to experience the value of their stake in the business by selling it.
The Final Word
As mentioned, HNIs and institutional investors are the primary investors in private equities. Generally, retail investors stay away from an investment that involves a high amount. Methods like fund of funds and crowdfunding can be the solution for retail investors to be a part of it. You are going to invest in a risky investment as these are unregulated funds. Therefore, you need to thoroughly research the company and its structure to check whether it can grow to the expected level. It may be difficult to gather such information for an individual. It is always prudent to seek the guidance of industry experts like RURASH Financials. Our team has the resources and experience you require to make a worthwhile investment.