Private Equity Fund in India – Meaning, Benefits and Examples

Private equity funds invest in companies that represent an opportunity for a high rate of return. Click here and learn the benefits, how do they work with examples.
What are Private Equity Funds?
3 mins read

What is a Private Equity Fund?

A private equity fund is a pool of capital that invests in companies (which are privately held and not publicly traded) to get higher returns. Common types of private equity funds include venture capital funds (VC), hedge funds, insurance companies, pension funds, and other alternate investments. This investment strategy is limited to a limited number of wealthy institutions and high-net-worth individuals (HNIs). Private equity fund investment comes with a lock-in period, which can range from 3 years to 10 years.

One of the main reasons why wealthy individuals and institutions opt for this investment is because it usually provides its investors with a return that is higher than that of the public market. As per a McKinsey report (June 2022), the total Assets Under Management under the private equity fund market is Rs. 11.7 trillion.

Also read: Mutual funds

Top 3 examples of private funds

Some of the popular private equity fund examples you may have heard of include:

Blackstone Group:

It primarily invests in:

  • Real estate private equity
  • Healthcare private equity such as Crown Resorts and Service King.

The Carlyle Group:

This private equity fund group has invested in a wide array of companies belonging to various sectors. Some of their mentionable investments are in Acosta and Memsource.

Apollo Global Management:

This private equity owns a wide range of brands including CareerBuilder and Cox Media Group.

Also explore: Compare mutual funds

How do private equity funds work?

Generally, a private equity firm or an investor group invests a pool of money in a prospective private company or a company group, which has a high potential of growing rapidly. Private equity fund invests in companies that need money to grow their operations/profit. These funds also invest in companies that are financially struggling. The money infused by the private equity funds helps struggling companies get back on their feet and eventually grow. In return, the private fund gets a stake in the management of the company. However, they only invest in such companies if the management of the private equity fund believes that the founders and promoters of the company can use the money to grow the company.

The main motive of private equity investors is to get a decent return from the private companies in which they are investing. They give money so that the struggling company can expand their business, make money, and in turn give them a profitable and high return exit after the lock-in period ends.

The decision-making works or management of private funds are done by the “general partners.” They not only decide where to make profitable investments but also manage the money of the fund.

But how do they raise money for investing? These private equity companies seek funds from limited partners. They also set goals for fundraising. When these companies achieve their fundraising goals, they close the round. Then they use this fund to invest in prospective companies that are looking for private capital to grow.

Once the companies turn around their fortune, the private equity funds withdraw their fund and holdings. In return, they get a hefty profit share during exit.

Also check: Leading mutual fund schemes

What are the benefits of private equity funds?

  1. Debt-free funding
    They provide financially struggling companies with debt-free capital. While emerging companies get a large amount of seed money for expansion and growth, the PE funds stay invested for a certain period to get a higher return at the time of exit after the company turns around its fortune.
  2. High growth potential of the untapped market
    The private funds usually invest in companies belonging to untapped markets. This gives them the potential to make good money. The private companies where PE funds usually invest are financially struggling firms, startups with high upward potential, unlisted companies, and more.
  3. Higher returns
    If you are a shareholder of a private equity fund, you can expect a higher return than an investment made in the public market. As PE funds invest in emerging businesses, the growth potential is extremely high. That’s why, in the long run, you can expect a significant return. The probability of getting higher returns increases as these private equity funds are run by experts who follow strict processes in choosing companies. This not only mitigates the risk to investors but also protects the rights of shareholders.

Final words

Private equity funds utilise multifarious investing strategies including venture capital, leveraged buyouts, turnaround situations, and growth capital. These PE funds explore the untapped markets to get higher returns to their investors.

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Frequently asked questions

What is an example of a private equity fund?
A private equity fund can be of different types including venture capital, fund of funds, real estate private equity, and many others. Some of the popular examples of private equity funds are Blackstone Group, Apollo Global Management, The Carlyle Group, and many more.
Is it good to invest in private equity fund?
Investing in a private equity fund is good for you especially if you are looking for desirable diversification in your investment portfolio with a long-term approach.
Why is it called a private equity fund?
A private equity fund is called so because it invests particularly in companies that are completely private companies or private equity (PE). It doesn’t invest in public companies or companies that are traded publicly.
Who funds private equity funds?
Institutional investors, high net-worth individuals (HNIs), pension funds, sovereign wealth funds, insurance companies, and other accredited investors fund private equity funds.
What is the difference between funds of funds and private equity?
The major difference between private equity funds and fund of funds is that the latter invest mostly in firms. Between the limited partners of a company and private equity firms, the fund of funds acts as an extra layer. Instead of funding deals or specific companies, they invest in firms.

What is the minimum investment for private equity?
Usually, the minimum investment for private equity funds is Rs. 25 million. However, it can be as low as Rs. 250,000. However, the private equity investor must stay invested for a minimum of ten years. According to SEBI’s updated guidelines, the minimum investment for Alternative Investment Funds (AIFs) under Category I (includes angel investors and venture capitals) and Category II (includes PE funds) in India is Rs. 10 million. Their minimum corpus per scheme should be Rs. 200 million. They must stay invested for at least 3 years.
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