Private equity is an investment made directly into a private company or public company that becomes private, in exchange for company’s partial ownership. Companies issuing private equities are not listed on stock exchanges like NSE and BSE. Private equities are highly illiquid as there are very few buyers in the market. Private equities are issued when the company wants to restructure its base.
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A private equity investment would be made through a private equity firm, a venture capital firm or an angel investor. These categories of investors have their own set of goals, preferences and investment strategies. However, they provide working capital to a target company, to nurture its expansion, developing new products, and restructuring the company’s operations, management, or ownership.
Below mentioned are the Private Equity Investment Strategies:
Leveraged buyouts generally use debt to finance their buyout plan. The goal of a leveraged buyout is to generate revenues on the acquisition that outnumbers the interest paid on debt.
By investing in a fund of funds, investors get benefits of diversification and the ability to hedge their risk by investing in various fund strategies. Investors must know that investing in fund of funds is costly as investors are subject to an additional layer of fees. In addition to the management fees and a performance fee that’s charged at the underlying individual fund level, investors are also levied with additional fees at the fund of funds level.
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Following are the popular private equity firms operating in India:
A private equity investment can be made in a private equity firm, a venture capital firm or an angel investor. These investment strategies have their own sets of goals, preferences and investment planning. However, all these strategies offer working capital to a target company, to facilitate expansion, starting new products, and redesigning the company’s operations, management and ownership.
There are two main ways in which a private equity firm makes money:
Apart from charging their investors, private equity firms also generate revenues from their portfolio companies through transaction fee which is usually charged at 1% of the total deal amount and monitoring fees which is the fee charged for consulting and advisory services.
Private equity firms utilize the cash flow from their investors to buy whole or partial interest in companies. The return on those investments, called the internal rate of return IRR, attracts new investors and defines the success of the firm.
Equity firms are reported to have found a way to artificially boost their IRR as interest rates are very low, by borrowing funds to make new investments. After holding on to the investment for some time, they use investors' investment to pay off the loan and take ownership of the asset when it looks like the investment is about to generate revenues. As a result, it looks like the investors got huge returns over a short period of time. The IRR looks better, but all thanks to the use of borrowed funds.
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