As India’s real estate is maturing and evolving at such a rapid pace, private equity is shaping to be an increasingly attractive investment avenue. It is no longer just confined to institutional investors with the benefits of oversized returns and ability to participate in long-term value derivation. From high-net individuals to family offices, are now actively seeking to invest in private equity in India.
Understanding Private Equity
Investing in private equity involves investing in private companies or acquiring public companies to improve operations, valuation and productivity. Unlike public equity, which is available to access through stock exchanges, private equity investments are illiquid, long-term and require a hands-on approach for value creation.
These funds focus on investing in companies in different stages such as high-growth potential startups, established companies, and underperforming assets. These investments allow companies to implement strategic changes to optimize operations for long-term value creation.
Ways to invest in private equity funds
Category II AIFs:
The most common way to invest in private equity funds is to invest in companies listed as Category II Alternative Investment Funds under SEBI regulations. These funds are used to pool capital from investors and then invested in unlisted companies or projects. This is the best choice for investors who want their due-diligence and deal sourcing to be handled by fund managers.
Direct Investments:
Individuals and offices with strong deal networks can invest directly with startups and growth-stage companies. Using direct investments to invest in private equity allows for more control but demands greater expertise and risk appetite.
The entry barriers are high with requiring market knowledge, legal knowledge and active involvement. The risks of investing in private equity through direct investments is higher concentration and lower liquidity.
PE backed PMS:
Portfolio management service platforms or wealth management firms often have the access to local or global PE funds allowing smaller investors to get indirect access to invest in private equity.
Risks associated when investing in private equity
While there is a high potential for high returns when you invest in private equity, there are significant risks that you need to be aware of.
- Illiquidity – Capital may be locked for a period of 5-7 years limiting your exit options.
- Execution risk – The growth projection and turnaround plans could fail.
- Valuation opacity – Valuations in private equity can be subjective, unlike listed assets and they are often updated quarterly or yearly.
- Limited diversification – Private equity funds tend to be concentrated in small numbers, they can be more volatile than other investments.
Investors are recommended to only allocate 5-15% of their portfolio to invest in private equity depending on their appetite for risk.
What returns to expect from private equity investments?
Historically, private equity in India has delivered IRRs (Internal rate of return) between 15 – 25% depending on the stage of the investment, market conditions, manager expertise, and sector performance. Early stage to growth stage private equity investments tend to derive higher returns but also pose a higher chance of risk. Late stage deals derive more stable returns with limited risk.
Private equity investments require a complex understanding of the financial and real estate market, strategic oversight, and market expertise. To invest in private equity in India, investors must balance ambition and balance, risk and return. A thorough due diligence, patience, and right partnering, one can expect to receive long term portfolio value and higher returns. While the asset class is not without risk, the long-term wealth creation creates a significant interest, especially from an emerging economy like India.
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