Let’s clear the term “Private equity Investments” word by word. Equity refers to ownership of assets or stakes in a company. Whereas, Investment refers to purchasing an asset to generate income or appreciation.
Investments most commonly are made in shares/ debentures through stock exchanges and the Investments in equity/debentures of companies that do not trade publicly or are not registered in stock markets.
- Private Equity Investments (PEI) can be made by
- Venture capitalists (VC)
- Angel Investor
- Private firm
Access to these asset classes is limited because investors are required to hold their investments for a long time. These assets are usually limited to high-net-worth institutions and individuals.
Pros and Cons
India is currently ranked as one of the most attractive private equity (PE) investments destinations. So have you ever wondered why Indian companies prefer PE over borrowing from other sources?
Here are the key merits of Private Equity Investments:
Interest in business
PE bodies also develop an interest in your business because their investments will appreciate only when our business does well. When a PE body invests in your business, you must rely on your commitment that you will be contributing your best to making the business a success.
No influence of public markets
Investors do not need to fear de-listing as these classes of assets are completely free from market controls. Private equity financing provides growth strategies without the pressure to sustain earnings for investors.
PE investors are usually well-to-do individuals with strong recognition and name. They bring with them a lot of experience and connections with higher authorities which can help firms in various ways. A good PE individual is a link between valuable business connections and a new community of peers.
PE bodies are cash enriched and can provide financial liquidity to accelerate business growth. These firms may provide the capital required for expansion, purchase new types of equipment, import new technology, or launch a new variety of products.
The PE bodies have deep fat pockets. They are also up to date with the latest skills and advanced technology. They act as an engine to carry new technologies and advancements in your business and are keen to help and support your business.
Private Equity has unique challenges. Below are some of them:-
Hard to reach
These kinds of assets can be hard to be obtained as a firm must search for investors/buyers separately unlike transactions on the exchange.
Dilution of ownership
Investments always come at a cost. You may get a lot more money with PE but you have to give up a significant stake in your equity. Sometimes, you will be left with only minority stakes as they often demand a majority share.
Loss of management control
Because PE investor stake is usually higher, the loss relinquishes may be much more. You can lose control of the management of your business. Rarely, it can also mean losing control of strategy making, employee management, and decision making.
Acquiring Private Equity from investors can be a frustrating and time-consuming process. You may expect investors to conduct a through research beforehand.
To find a PE investment you must adhere to the following steps:
- Offer lucrative interest rates to be eligible.
- Approach an actively looking PE firm
- Make the best deal
Ways to exit from a PE investment
- Trade Sale
- Secondary Sale
In this type of investment, a business needs to offer higher returns and a lucrative exit to attract investments.
On the other hand, PE firms are the large houses that are looking for higher returns. A firm not offering higher returns will struggle.
The process of getting a PE deal done is very complex. The investors are mostly experienced and well-aware, so the firms need to be aware.
Private equity is a unique type of funding option and comes with its own merits and demerits. It can help to arrange large chunks of funds but may lead to loss of management control or dilution of stake. Our business is put into the hands of external bodies whose interests may not be fully in our favor.