How to Invest in Private Equity

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EXPLORE FUNDS
How to Invest in Private Equity in India
EXPLORE FUNDS
3 min
02-December-2024

Private equity, unlike mutual funds, is an investment that is not meant for every investor. It is an alternative investment fund through which wealthy investors invest primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund.

The private equity investment is exclusive for companies which are not listed on a stock market but have a potential to grow, which therefore attracts the investors. Private equity is a long-term and large-scale investment which offers higher returns than traditional investments. The investors gain returns when the company’s operations grow and it becomes profitable.

Why invest in private equity?

A private equity investment is done after a carefully done detailed assessment of the company during which its growth prospects are forecast and potential for generating profits is considered. There are several reasons why institutional investors and high-net-worth individuals invest in private equity.

One of the reasons for making investments in private equity is the potential for high returns. Another reason for investing in private equity is that it provides investors access to potentially successful companies at a very stage. Also, a private equity investment gives investors a chance to shape the future of the company and help it improve its performance.

Also read: What Is Compound Annual Growth Rate (CAGR)

How to invest in private equity?

If you are wondering how to invest in private equity, here are the several ways by which private equity investments are made.

  • Fund of Funds
  • Private Equity ETF
  • Special Purpose Acquisition Companies (SPACs)
  • Crowdfunding

Fund of Funds

It is a fund which invests in multiple Alternate Investment Funds (AIFs) including private equity funds. The Fund of Funds is a private equity investment strategy of investing in investment funds - which are invested in private equity funds - instead of in stocks, bonds and securities. It is an investment option for smaller investors to gain access to private equity funds.

Private Equity ETF

Private Equity ETFs is a category of electronic traded fund which indirectly invests in unlisted companies. This investment option lets smaller investors invest in publicly-listed private equity companies which then invest in privately held companies. Also investment in private equity ETF gives investors a liquidity option.

Special Purpose Acquisition Companies (SPACs)

It is a shell company which is formed for the purpose of attracting investments through an initial public offering. These companies are also referred to as “blank check companies”. The motive of the formation of SPACs is to invest or acquire a private company for which the funds are raised through IPO.

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Types of private equity investments

Now that you know how to invest in private equities, you must also understand that there are various types of private equity investments. These are categorised on the basis of the stage of investee companies, size of investment and risk profile. Here are some of the key types.

Venture Capital: This private equity investment is made into companies which are in their formative years, for example a new startup or an early-stage business. Venture capital funds usually take a minor stake which leaves control of the investee company in the hands of its founders or company management.

Leveraged Buyout: The purpose of this private equity investment is to eventually buy a company or seek a larger stake in it. Here the investment funds are combined with debt or borrowed money to meet the acquisition cost.

Growth Equity: Here the companies seek investments for the purpose of expanding its operations, that is why it is also called expansion equity. This type of private equity investments is usually done in case of mature companies.

Mezzanine Capital: This is usually considered to be halfway between debt financing and raising equity capital.

How Much Money Do You Need to Invest in Private Equity?

Private Equity fund is categorised as level II Alternative Investment Fund and is guided by SEBI rules and regulations which governs how to invest in private equity. While SEBI allows AIFs to raise funds from investors, whether they are Indian, foreign or non-resident Indians, it puts the minimum value of investment at Rs one crore. In case of the investors being employees or directors of the AIF, the minimum investment value is Rs. 25 lakh.

How Risky Is Investing in Private Equity?

Like any other investment product, investing in private equity funds comes with a set of its risks.

  • Operational risk: It is a risk associated with inadequate processes and support structures within the investee company.
  • Liquidity risk: It is rooted in the investors’ inability to redeem the investment before the lock-in period ends.
  • Market risk: Though market fluctuations do not directly impact the private companies, their valuation is impacted by drastic market exposure.
  • Capital risk: It is linked to the possibility of a complete failure of the investee company, which can cause loss of capital investment.

Conclusion

Private equity funds are becoming an essential part of the process of diversification of investment portfolio. While it is good to know about how to invest in private equity, it must also be kept in mind that such investments are not possible for small-time investors.

Know more about private equity funds and also explore hundreds of mutual fund schemes at the Bajaj Finserv Platform. Use the SIP Calculator or Lumpsum calculator to plan your financial goals better and compare mutual funds to pick ones that are best suited for your portfolio.

Essential tools for all mutual fund investors

Mutual Fund Calculator Step Up SIP Calculator SIP Return Calculator ICICI SIP Calculator
SBI SIP Calculator Groww SIP Calculator Axis SIP Calculator Motilal Oswal Mutual Fund SIP Calculator
LIC SIP Calculator Nippon India SIP Calculator Kotak Bank SIP Calculator HDFC SIP Calculator

Frequently asked questions

Can a regular person invest in private equity?
Yes, a regular person can invest in private equity through mutual funds, ETFs, crowdfunding, and SPACs.
How much money do I need to invest in private equity?
As per the SEBI, investments in private equity have to be a minimum of Rs one crore, with an exception of Rs 25 lakh for employees and directors of the company.
How do I get into private equity?
You can get into private equity through mutual funds, SPACs, ETFs or crowdfunding.
What is the rule of 72 in private equity?
This rule is generally used to calculate the number of years in which the investment gets doubled.
What is the 2 20 rule in private equity?
2-20 rule means the General Partner’s management fee is 2 percent of the investment and 20 percent of the profit.
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