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Private equity (PE) plays a key role in funding unlisted companies, especially in emerging markets like India. PE firms invest in high-growth businesses, help restructure them, and aim for long-term returns. Within private equity circles, common exit strategies include: An initial public offering or IPO, whereby the company lists its shares on a public stock exchange, allows private investors to dispose of their stakes – either gradually over time or all at once. This article explains how the PE market works, from funding stages to exit strategies.
Private equity refers to investment capital provided to private companies or public companies that are to be delisted, in exchange for ownership or a controlling stake. These investments are typically made by:
Private equity firms
Venture capital firms (for early-stage businesses)
High-net-worth individuals (HNWIs)
Institutional investors (like pension funds or sovereign wealth funds)
The main goal is to enhance the value of the company and eventually exit with a profit.
The following table outlines the key characteristics that define private equity investments:
Feature |
Description |
|---|---|
Unlisted Companies |
Targets are usually not listed on stock exchanges |
Long-Term Horizon |
Investments span 4–7 years or longer |
Active Involvement |
PE firms often guide strategy, governance, and operations |
Illiquidity |
Cannot be easily sold like public shares |
Higher Risk, Higher Return |
Involves both operational and financial risks |
The private equity lifecycle follows a structured process from fundraising to exit, as outlined below:
PE firms first raise capital from limited partners (LPs), such as pension funds, insurance firms, and family offices. This pooled fund is called a PE fund, typically structured as a limited partnership.
Once capital is raised, the PE firm identifies potential investee companies. Detailed due diligence is conducted to assess:
Financial performance
Legal structure
Growth potential
Industry and competitive landscape
If the deal passes due diligence, the PE firm negotiates terms and injects capital. The investment may be structured as:
Common equity
Preferred equity
Convertible instruments
Debt with equity options
Post-investment, PE firms work closely with company management to:
Improve operational efficiency
Enter new markets
Strengthen governance
Make strategic acquisitions
The final goal is to exit the investment and return capital (plus gains) to the fund’s LPs. Exit routes include IPOs, acquisitions, or secondary sales.
The following are the main types of PE investments:
Invests in early-stage startups with innovative business models and high growth potential.
Targets mature companies looking to expand or restructure operations without changing ownership control.
PE firms acquire a controlling interest or entire ownership of the company. Leveraged buyouts (LBOs) use significant debt to fund acquisitions.
Capital is infused into struggling companies to help them recover and become profitable.
Private equity firms use various exit routes to realise returns on their investments, as shown in the table below:
Exit Route |
Description |
|---|---|
Initial Public Offering (IPO) |
Company lists on stock exchange; PE sells shares post-lock-in |
Strategic Sale |
Sold to another company in the same sector (M&A deal) |
Secondary Sale |
PE firm sells its stake to another PE or financial investor |
Buyback |
Promoters or the company repurchase the shares |
Liquidation |
Last resort in case of business failure |
Private equity plays a growing role in shaping India’s business landscape and economic development in several key ways:
Boosts entrepreneurship by funding startups and SMEs
Enhances corporate governance and professionalism
Supports job creation and economic growth
Helps companies scale faster and compete globally
Some major PE-backed companies in India include Flipkart, Byju’s, and OYO, which benefitted from funding rounds at different stages of growth.
Private equity funds in India are regulated under SEBI’s Alternative Investment Funds (AIF) framework. These funds must:
Register under Category I, II or III AIFs
Follow investment restrictions and disclosures
Comply with reporting and auditing standards
Private equity investing comes with several challenges that investors and firms must navigate, such as:
Since investee companies are unlisted, valuation relies on projections and comparable market data, which can be uncertain.
Market conditions or internal issues can delay exits, affecting returns.
Sector-specific rules, foreign ownership caps, and taxation policies can complicate transactions.
PE investments are not liquid and may result in partial or complete loss of capital if the business fails.
The following table highlights the key differences between private and public equity investments:
Feature |
Private Equity |
Public Equity |
|---|---|---|
Listing Status |
Unlisted companies |
Listed on stock exchanges |
Liquidity |
Illiquid |
High liquidity |
Investment Horizon |
Long-term (4–7 years) |
Flexible |
Control |
Often involves board representation |
Generally limited to voting rights |
Return Profile |
High risk, potentially high return |
Market-linked, often more stable |
Private equity supports India’s business growth by funding unlisted companies—ranging from startups to turnaround ventures. While it offers capital and strategic guidance, it also involves higher risk and longer horizons. Understanding the PE process helps investors and entrepreneurs navigate this evolving space effectively.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Private equity refers to investing in companies that are not listed on stock exchanges, with the goal of improving them and earning returns upon exit.
No. Venture capital is a subset of private equity that focuses on early-stage companies, while PE can also invest in mature or distressed businesses.
Through management fees and a share of the profits known as carried interest, usually realised at the time of exit.
Direct access is limited. However, retail investors can gain exposure through Category II AIFs, PMS services, or specialised investment vehicles regulated by SEBI.
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Posted on 18 Aug
Geetanjali Lachke
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