What is the Private Equity Market?

Private Equity Market in India

The private equity market in India has grown rapidly in the last five years. Over 86% of the total $11.79 billion in private equity-backed investments in 2023 were from outside sources. It is driven by a mature corporate ecosystem that increases the availability of managerial talent. The fast-growing private companies operate in sectors like technology, healthcare, and consumer, aligning with the country's growth trajectory. 

Retail inventors often wonder what is private equity market because it is not publicly listed. You must find platforms that associate with private equity investors and allow you to pool in to invest in growing companies. 

Types of Private Equity Investors

The PE market is a crucial funding source for promising businesses. These empower budding entrepreneurs to innovate at scale and become potential market leaders. Recent reports are concerning as the PE fundraising in the Asia Pacific region is expected to decline by 6.5% until 2028. However, demographic advantages, a thriving entrepreneurial ecosystem, and digital adoption provide compelling opportunities for private equity investment. Many major players contribute to this dynamic landscape. 

Venture Capitalists 

Venture capitalists fund startups and early-stage companies with high growth potential. They take a minority equity stake in the company and offer funding. The entrepreneurs can also get strategic guidance and operational support from their venture capitalists. However, company management has control of the business. It is a riskier investment strategy because these early-stage companies generally have no track record of growth. 

Growth Capital Investors 

After a company is launched, it needs growth capital funds to scale and grow. Growth capital investors invest in early-growth companies in exchange for equity or convertible debt. The companies use these funds for financial expansion. Some funds are allocated to R&D, and sometimes, they are also used for working capital needs. This type of investment is slightly less speculative because investments are made in profitable companies with higher valuations and little debt. 
 
Pension Funds 

Many public pension funds have started investing in alternative investments like private equity to make up for the shortage of investment choices. Pension fund managers carefully invest in the private equity market to benefit from the higher return potential. The returns are used to fund pension obligations and benefit pension beneficiaries. 

Sovereign Wealth Funds (SWFs) 

SWFs are state-owned investment funds that invest in the private equity market to diversify their holdings and support national economic development. Funds come from the country's surplus reserves, such as natural resources revenue, excess budgeting, and trade surpluses. In 2023, Norway SWF disclosed its assets, showing $24 billion in investments in India by the end of December. SWFs from other countries like Abu Dhabi, Ireland, Malaysia, etc, are also showing interest in investing in India's growing sectors. 

Buyout funds 

Buyout funds are an investment type that acquires controlling stakes in established companies. The primary objective is actively managing and enhancing the company's value to generate returns. Buyout funds use a leveraged buyout (LBO) strategy to combine equity and debt financing to increase returns using financial engineering and operational improvements. The investment horizon is finite, ranging from 3 to 7 years, and buyout funds exit at a profit through IPOs, secondary buyouts, or strategic sales. 

Specialised Funds 

Specialised funds are a group of PE funds focusing primarily on specific industry sectors with high growth potential. Generally, sectors like healthcare, technology, infrastructure, and consumer goods attract these types of investors. Some types of funds focus on geographic or stage-specific funds. Turnaround or distressed funds invest in underperforming companies to generate returns by improving the company. 

How Does Private Equity Work?

How to Analyse Private Equity?

Detailed analysis and due diligence play a crucial role in evaluating PE investment opportunities. The primary factors that measure private equity performance are:

• Internal Rate of Return (IRR) – implied annual rate of return on the investment. 
• Multiple of Invested Capital (MOIC) – net total return from the investment (final amount divided by initial investment) regardless of the investment horizon
• Public Market Equivalent (PME) – comparison of PE performance to the same investment in a public stock market during the same period. 

How to Invest in Private Equity?

As per private equity market definition, it requires a substantial amount of money invested directly in private companies through direct investments, private equity funds, or funds of funds. It is reserved for institutional investors and high-net-worth individuals. However, the Indian private equity market is slowly becoming inclusive with newage platforms that can pool retail investors together to invest in private equity assets. You can find mutual fund schemes with PE exposure and specialised FOF mutual funds. Many Alternative Investment Funds (AIFs) have higher minimum requirements for retail investors. Angel investment platforms also connect startups with angel investors. 

Conclusion

The private equity market offers diverse investment opportunities for investors to be a part of private companies at various stages of their lifecycle. While such investments offer attractive returns, there are numerous risks involved. Due diligence is crucial to evaluate companies worthy of investing. Retail investors should be cautious while diversifying their portfolios with private equity participation.