What is the Private Equity Market? From Funding to Exit Strategies

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:

The private equity lifecycle follows a structured process from fundraising to exit, as outlined below:

Fundraising

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.

Deal Sourcing and Due Diligence

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
  

Investment Structuring

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
  

Value Creation

Post-investment, PE firms work closely with company management to:

• Improve operational efficiency
  

• Enter new markets
  

• Strengthen governance
  

• Make strategic acquisitions
  

Exit Strategy

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:

Venture Capital (VC)

Invests in early-stage startups with innovative business models and high growth potential.

Growth Capital

Targets mature companies looking to expand or restructure operations without changing ownership control.

Buyouts

PE firms acquire a controlling interest or entire ownership of the company. Leveraged buyouts (LBOs) use significant debt to fund acquisitions.

Distressed or Turnaround Investments

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:

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:

Valuation Complexity

Since investee companies are unlisted, valuation relies on projections and comparable market data, which can be uncertain.

Exit Delays

Market conditions or internal issues can delay exits, affecting returns.

Regulatory Hurdles

Sector-specific rules, foreign ownership caps, and taxation policies can complicate transactions.

High Risk

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:

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.