Benefits Associated with Private Equity Firms

Often founders of startup companies are not able to trust on conventional funding sources. Private equity is an alternative source of funding, provided by a stable foundation of long-term strong investors, like private or public pension plans, family offices, corporations, and charitable foundations.

Private investors are expected to bring attractive returns for their stakeholders i.e. corporate, partners, public compared to other traditional investments sources e.g., bonds, stocks, and cash equivalents. 

Benefits of Private Equity Funds in India 

The most pivotal benefits associated with private equity ownership, enabling the company to create value and realize capital benefit in a repeatable manner, include: 

• The cluster of expected company investments is immense for private equity. These are unchartered landscape of opportunity. They often invest in small companies that have just started out in their respective field of journey; they also invest in unconventional sections of huge corporations; they are more interested in investing on those listed companies that are not popular and mostly under estimated and under-appreciated in the stock markets.

• Private equity firms in India are quite articulate and invest in prominent resource for evaluating the potential of firms, to realize the risks associate and the ways to alleviate them. These firms often drill down from several potential companies to the one that has all the required potentials to attain growth.

• PE firms invest in companies to improve its potential and make it more valuable, over a couple of years, prior to ultimately selling it off to a buyer. This is what makes private equity firms patient investors, focusing on long-term performance targets.

• The management of the company, run by private equity funds, is answerable to an engaged professional shareholder with the right to act prudently to protect its shareholding.

• The fusion of this well defined accountability between shareholders and company managers, combined with the requirement for a realization says that the structure of incentive can associate with the valuable reward. Failure does not call for any reward.

• Such delineated accountability offers several benefits giving comfort to potential money lenders, enabling investments to yield the dividends.

Synopsis

Above said are some of the benefits, associated with private equity funds, offered by private equity firms in India to the start up businesses looking for long term benefits.

How Do Private Equity Funds in India Work?

In several cases, private equity funds in India are provided by the traditional private equity firms in India, which are formed by a group of investors, who have pooled their money together for promoting businesses with their investments. These investments include providing funds for start-up businesses, which have just entered the market to established and developing companies, mainly private companies, who first prefer to stay private before possibly taking the public route at a later stage.

Private equity investment comes in different forms that usually comprises of purchasing equity securities, providing growth capital, venture capital and mezzanine capital. Each of this investment type is carried out in specific types of situations in order to reach targeted objectives. In the realm type of investing, investors usually provide required financing to take control of companies. Investors prefer to purchase equity securities, which entitles them for an ownership share in the company.

Private equity firms in India sometimes purchase businesses, which are normally called as leveraged buyouts (LBOs). This type of businesses is generally funded by large debt amount. These transactions carried out simply means those assets of the businesses being bought together with the firms doing the procedure of buying will be used as collateral.

As startup businesses are at their initial stage and just have entered the market, they don’t possess that capital as required at initial stage to run the business smoothly, but later can prefer to raise capital by issuing bonds or stocks to the public. For such startup or new ventures, even banks don’t provide financing options, so the owners of such businesses usually choose to opt for investing in private equity funds in India. The other reason is that start-up companies usually don’t have substantial earnings and are extremely risky to be provided funding, but for agencies, the companies might look very promising.

Private equity investing can be made through investments done on the secondary market. Typically, it has been seen that private equity transactions require investors to stay committed to oversee their investments for a specified time limit, which can be pretty long. Thus, secondary market allows investors to come out of their commitments, before the end of the particular period, which in turn allows other investors to enter.