Private Equity Funds: Meaning, Types, How They Work and Risks

In summary

Private equity funds pool money from investors and invest primarily in companies that are not available through ordinary public-market investments. In India, private equity funds generally operate as Category II Alternative Investment Funds (AIFs).

• Category II AIFs include private equity funds under SEBI's framework.
• AIFs generally require a minimum investment of Rs. 1 crore, subject to applicable exceptions.
• Category I and II AIFs are close-ended with a minimum tenure of three years.
• Private equity investments can remain illiquid for several years.
• Returns are generally realised when portfolio investments are sold or otherwise exited.
• Fees can include management fees and performance-linked carried interest.

The Bajaj Broking website provides investment-related information, while private equity funds operate under SEBI's AIF regulatory framework.

A private equity fund is a privately pooled investment vehicle that collects money from eligible investors. It uses this capital to invest mainly in privately held or unlisted companies.

In India, private equity funds are generally registered as Category II Alternative Investment Funds (AIFs). They are not regulated as mutual funds. Category II AIFs are close-ended and have a minimum tenure of three years, although the actual tenure may be longer. The standard minimum investment is generally Rs. 1 crore, subject to specified exceptions. 

Private equity funds may use strategies such as venture capital funds, growth capital, buyouts, and turnaround investments. Their size may be described using Assets Under Management, which represents the value of assets managed by the fund.

These funds usually receive capital commitments from institutions, family offices, high-net-worth individuals, and other eligible investors. Investors generally cannot withdraw money whenever they want.

Private equity funds are grouped by the types of companies they invest in, their ownership approach, and the method used to generate potential returns for investors.

• Venture capital funds: Invest in early-stage companies with growth potential.
• Growth equity funds: Support established companies seeking capital for expansion.
• Buyout funds: Acquire controlling stakes in mature companies.
• Turnaround funds: Invest in financially or operationally struggling businesses.
• Secondary funds: Purchase existing interests in private equity funds.
• Fund-of-funds: Invest across multiple private equity funds.

Several global investment firms manage private equity funds across industries and regions. The following examples illustrate established private equity managers rather than specific investment recommendations for readers.

The availability, strategy, and performance of individual funds can change. Investors should review the current placement memorandum and regulatory documents instead of relying only on the firm’s name.

A private equity fund follows a planned cycle from fundraising to exit. Understanding each stage helps explain why investors may wait several years for returns.

1. Fundraising: The manager collects capital commitments from eligible investors called limited partners.
2. Fund closing: The fund stops accepting commitments after reaching its target or final closing date.
3. Company selection: The manager identifies businesses and reviews their finances, management, operations, risks, and growth prospects.
4. Capital calls: Investors provide committed money when the fund needs capital for investments, fees, or expenses.
5. Business development: The manager may support strategy, hiring, governance, expansion, cost management, or restructuring.
6. Exit: The fund may sell its holdings through an IPO, strategic sale, secondary sale, or promoter buyback.
7. Distribution: Sale proceeds are distributed according to the fund agreement after expenses, fees, and carried interest.

An exit is not guaranteed. Weak business performance, market conditions, regulatory issues, or limited buyer interest may delay the exit or reduce the amount returned.

Private equity can support business development and give investors access to private companies. However, every benefit depends on the manager, strategy, and selected investments.

• Access to private businesses: Investors can gain exposure to companies that are not listed on public stock exchanges.
• Active ownership: Fund managers may work with company management to improve operations, governance, and financial planning.
• Long-term capital: Companies can use the investment for expansion, acquisitions, technology, recruitment, or restructuring.
• Different return drivers: Private company performance may depend on factors that differ from daily public-market movements.
• Potential value creation: Operational improvements and business growth may increase the company’s value before the fund exits.

These benefits do not ensure higher returns. A private company may fail to grow, and the fund may lose part or all of the invested capital.

Private equity funds involve risks that may be greater than those of liquid market investments. You should understand these risks before making a long-term commitment.

• Illiquidity risk: Investors may be unable to withdraw or sell their investment before the fund ends.
• Capital-loss risk: Portfolio companies may underperform, fail, or be sold below their acquisition value.
• Valuation risk: Unlisted companies do not have continuously available market prices, making valuations less transparent.
• Leverage risk: Borrowing used in some buyouts can increase gains but can also increase losses.
• Concentration risk: A fund may invest in a limited number of companies, sectors, or regions.
• Exit risk: An IPO or sale may be delayed because of weak markets, business problems, or limited buyer demand.
• Fee risk: Management fees, operating expenses, and carried interest can reduce the amount distributed to investors.

Past performance does not guarantee future results. Investors should not treat target returns or projected exit values as assured outcomes.

Private equity funds separate investment management from capital contribution. The following table explains the main participants and their responsibilities within a typical fund structure.

The fund documents explain the manager’s powers, investor rights, decision-making process, and distribution rules. Limited partners generally have limited liability, subject to the legal structure and agreement.

Traditional private equity funds are generally designed for institutions, family offices, high-net-worth individuals, and other eligible investors. In India, investors can access these strategies through eligible SEBI-registered AIFs.

Before investing, you must complete the fund’s onboarding, know-your-customer checks, eligibility assessment, and documentation. You must also understand the commitment schedule because the manager may request money through capital calls instead of collecting the entire amount immediately.

Another route is buying shares of listed alternative asset managers such as Blackstone, KKR, Apollo, or Carlyle through an eligible brokerage account. However, owning these shares is not the same as investing in their private equity funds. Share prices reflect the listed company’s complete business, market expectations, and financial performance.

Selecting a private equity fund requires more than checking its past returns. The following factors can help you evaluate its strategy, management, fees, risks, and exit experience.

• Track record: Review realised and unrealised performance using measures such as Internal Rate of Return and Multiple on Invested Capital.
• Team experience: Check whether the management team has experience in the sectors, company stages, and strategies covered by the fund.
• Investment strategy: Understand whether the fund focuses on venture capital, growth investments, buyouts, or turnaround opportunities.
• Fund size: Assess whether the fund’s corpus matches its proposed deal size, portfolio size, and investment strategy.
• Portfolio concentration: Review how investments may be spread across companies, sectors, industries, and regions.
• Fee structure: Examine management fees, performance fees, expenses, hurdle rates, and carried-interest arrangements.
• Due diligence: Understand how the manager examines business quality, finances, management, legal risks, and exit possibilities.
• Exit record: Review completed exits, holding periods, write-offs, and investments that remain unrealised.
• Reporting standards: Check how often the manager provides valuations, portfolio updates, risk disclosures, and financial statements.

Do not rely only on target returns. Read the placement memorandum and seek professional advice when the investment terms or risks are difficult to understand.

Private equity funds invest in private companies through strategies such as venture capital, growth capital, buyouts, and turnaround investing. They may provide access to private-market opportunities but involve high risk, long holding periods, uncertain valuations, and limited liquidity.

Private equity funds are not mutual funds. If you prefer market-linked schemes with lower entry amounts, the Bajaj Broking website provides access to 4,000+ mutual fund schemes. Use the SIP calculator or lumpsum calculator from Bajaj Finance to estimate possible outcomes and explore top-performing mutual funds based on your goals and risk tolerance.