Private Equity Investment Primer

The term private equity has become a common phrase frequently used in papers and blogs. Though many people talk about it or use it in discussions but only a few have an absolute understanding of private equity. 




What

Well technically a private equity the equity that is applicable for private companies i.e. not publically traded, hence PE is the equity which is not traded or listed publically. It is made up of several firms who invest directly into private entities at different stages and stability of maturity and cash flow. The underlying objective of investing in private companies is obviously to maximize the return on investment as they invest in growing companies with potential of making it to the IPO. PE firm also invest in Real estate India. The pool of investors is comprised of several pension and endowment funds, and few large PE firms funded by a bunch of accredited investors who are individual investors with affluence and stable income source.

How

Private equity firms are usually differentiated on the basis of the investment strategies they choose to use. The strategies are broadly classified into two groups.

• Venture capital investments: venture capitalist tend to maximize their returns on investment by purchasing shares in high potential low maturity companies in rather newer markets or less fragmented and wait until either for the company to get listed publically or until they need to liquidate for other cash commitments.

• Leveraged buyouts: Leverage Buyout Firms buy out private firms or a business unit to leverage the situation. But unlike the venture capital firms who borrow from a pool of investors, they use dent financing to raise funds required for the buyout. So leverage buyout firms only contribute a fraction of the proposed purchase price and leverage the investment by maximizing their potential return as they put the operations and assets of the purchased firm as collateral.

The private equity investment in India is booming thanks to some well know firms like Everstone Capital. And the nation is likely to see similar trends in future which are good for its economic growth.

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