How to Invest in Private Equity in India - 2024 (2024)

Fund of Funds

It is a fund which invests in multiple Alternate Investment Funds (AIFs) including private equity funds. The Fund of Funds is a private equity investment strategy of investing in investment funds - which are invested in private equity funds - instead of in stocks, bonds and securities. It is an investment option for smaller investors to gain access to private equity funds.

Private Equity ETF

Private Equity ETFs is a category of electronic traded fund which indirectly invests in unlisted companies. This investment option lets smaller investors invest in publicly-listed private equity companies which then invest in privately held companies. Also investment in private equity ETF gives investors a liquidity option.

Special Purpose Acquisition Companies (SPACs)

It is a shell company which is formed for the purpose of attracting investments through an initial public offering. These companies are also referred to as “blank check companies”. The motive of the formation of SPACs is to invest or acquire a private company for which the funds are raised through IPO.

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 fundsusually 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 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.

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.

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