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 private equity is supposed to create value
Private equity (PE) firms aim to generate value by acquiring businesses, improving their performance, and eventually exiting with a profit. Here's how they typically create value:
- Operational improvements: PE firms often work closely with management to streamline operations, reduce costs, and improve productivity across the business.
- Strategic guidance: They provide strategic direction—such as market expansion, new product lines, or acquisitions—to drive business growth.
- Financial restructuring: PE investors may optimise the company’s capital structure by reducing debt, managing working capital, or unlocking hidden financial efficiencies.
- Stronger governance: By introducing better corporate governance and professional leadership, PE firms help businesses scale and run more effectively.
- Exit planning: After enhancing the company’s value, the PE firm exits through an IPO or sale, aiming to deliver substantial returns to investors.
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.
What returns to expect from private equity investments?
Private equity investments are known for their potential to generate high returns, especially when compared to traditional investment avenues. However, they also carry higher risk and longer holding periods. Historically, well-managed private equity funds have delivered annualised returns in the range of 15% to 25%, depending on the stage of investment, market conditions, and execution strategies.
Since private equity involves investing in unlisted or early-stage companies, the returns can vary widely. Unlike public market instruments, liquidity is limited, and investors may have to wait several years before realising gains through an exit like an IPO or acquisition.
Private equity is often considered a high-risk, high-reward asset class and may not be suitable for all investors. It works best for those with a high-risk appetite, longer investment horizon, and the ability to handle market volatility. Proper due diligence and fund selection are crucial for maximising returns.
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
