Private Equity

When a private equity firm agrees to manage a company’s fund investments, they do so in order to help the client in raising capital to launch private equity fund for acquiring a company. Private equity firms then gain the title of general partners of the company. Such firms offer their services in exchange of a fee and a share of profits usually more than the preset minimum known as hurdle rate.

With the record buyouts of total $1.1 trillion in 2021, the private equity industry has reflected a steep rise in the market value since 2000. Numerous alternative investments and equity funds have generated quite solid returns.

Generally, people tend to invest more in private equity when the stock prices are high and interest rates are low. However, the frequency of private equity investments rides low when cyclical factors become prominent.

Exhibit 1. Classification of Private Equity for Portfolio Companies on the basis of Stage and Type of Financing

Broad category	Subcategory	Description
Venture Capital	Seed stage	Financial backup for conducting market research, developing prototype products, researching business ideas etc.
	Start-up stage	Financial backup to freshly started companies who come with detailed and proper business as well as marketing plans
	Later (expansion) stage	Financial backup to the companies with generating sales and revenues. Financial solutions to expand product development, production capacity, or helping with working capital.
	Replacement capital	Financial backup to buy shares from other venture capital investors or to diminish financial control
Growth	Expansion capital	Financial backup to matured and established companies for business expansion and/or to enhance operations. It is done so in exchange of a minor stake in equity.
Buyout	Acquisition capital	Financial backup, with the end goal of acquiring another company, in the way of debt, equity or quasi-equity to a company
	Leveraged buyout	Financial backup from an LBO firm to acquire a company
	Management buyout	Financial backup to the company seeing to acquire a new company, a certain product line or a division
Special Situations	Mezzanine Finance	Financial backup in the way of subordinated debt and an equity kicker (warrants, equity etc.) frequented to LBO context
	Distressed/Turnaround	Financial backup to the companies distressed by the lack of finances or requiring restructuring
	One-time Opportunities	Financial backup in lieu of altering industry trends and updated government regulations
	Other	Activist investing, funds of funds, secondaries etc. are a few more ways of private equity financial backups

Latest Developments/News

According to the data shared by Refinitiv, the year 2022 witnessed the lowest frequency of investments in private equity. It fell by 42%, down to $23.3 billion, lowest since the year 2019. The major reason is said to be the rising interest rates and geopolitical tensions which ultimately led the global investment firms approach the private equity market with caution.

More from the data, some of the internet-specific and computer software companies contributed to maximum investments in 2022. Byju's $800 million fundraise is an excellent example. Another example could be investment into DailyHunt's parent VerSe Innovation and Swiggy.

Such figures made these two sectors share the larger responsibility of private equity investments in India during 2022. Despite the lower financial investments, they were worth more or less 66% or $15.3 billion. In 2022, the importance of equity declined for the internet-specific companies by 57.4% which is $8.6 billion across 528 deals whereas 2021 had it $20.1 billion across 556 deals. Year 2022 also witnessed the computer software sector surrendering to a 46.4% decline in investment to $6.8 billion. Other sectors that followed the same trend were financial services, medical and health sectors.

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Frequently Asked Questions

1. What is private equity?

Private equity funds are pooled investments that are generally limited to or not open to small investors. Private equity firms invest the money collected on behalf of the fund’s investors by taking controlling stakes in companies. The private equity firm then works with company executives to make the businesses so they can sell them later at a profit.

Private equity firms invest capital in the companies with high potential and net-worth to expand and acquire new businesses. It is usually HNIs (High Net-worth Individuals) or UHNIs (Ultra High-net worth Individuals) who make the investment securing the capital as a fund. After a few years, the acquired company is sold in the market for the higher value than it was purchased. The difference in the investment and selling is the profit that the investors and fund manager seek to collect.

2. What is the distinction between private equity and venture capital?

Private equity indicates management buy-outs and buy-ins. Private equity investors invest only in mature companies with potentially high worth.

Venture capital, on the other hand, are the firms who tend to invest in bussing companies or companies still in the ‘seed stage’ such as start-ups, businesses with early years if development or small businesses. Such businesses need cash and have low track record of business growth.

3. What are the different types of private equity in India?

Types of Private Equity in India

Venture Capital

VC firms are the type of private equity companies who invest in start-ups and companies in developing stages which are forecasted to grow. Venture capitalists get equity for their investment but they only prefer a minority stake in their portfolio companies.

Buyouts

Private equity firms prepare their deals as buyouts, buying an established, even publicly traded, company and taking it private. In this event, the previous investors of the company take their shares so that the private equity firm remains the sole investor, with a controlling share.

Growth Equity

PE firms sometimes opt for established businesses and invest their capital to fund the company's expansion or acquisition. The PE firm is anticipating profit from the growth. Since the firm only takes a minority share, it runs low on risks.

4. Why should I think of availing private equity instrument?

Private equity instrument allows the managers to own a significant portion of the business. Apart from the merger of their capital sums, the aligned interests, experience and business insights that the fund managers bring in makes private equity an instrument worth investing in.

5. Who are the beneficiaries of private equity?

Below are the commodities who benefit from private equity instrument:

Investors: investors gain from high ROIs and lower unpredictability than public markets
Companies: companies get the access to capital as well as business expertise and guidance
Workers: Workers benefit working for powerful companies

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