In a big boost to the startup industry, India added over two dozen Unicorns in the first eight months of this year, according to Hurun India Future Unicorn 2021 report. A ‘unicorn’ in the business sense is a small company that is valued at over $1 billion and enters an elite group of similar companies termed Unicorns.
This surge shouldn’t come as a surprise though given the vibrant start-up culture in the nation. India is home to the 3rd largest start-up ecosystem in the world, expected to witness a consistent annual growth of 12-15%. The Indian startups have gone on to raise funds of sizable ticket sizes from various domestic and global sources. According to a PwC report, deal activity in India during the first half of 2021 amounted to US$ 40.7 billion across 710 deals, including both private equity (PE) and strategic acquisitions (M&A).
This underlines the need for alternate funding in private companies that are mutually beneficial to both the investor and the company seeking expansion funding.
What is Private Equity?
Private equity is a form of alternative investment where a wealthy individual invests money/capital into a private company that is not listed on the stock exchange. Private equity is an asset class that allows high net worth investors (HNIs) to invest in private companies with the potential to scale up and flourish in the future. Instead of investing in the stock market, bonds, and other conventional forms of asset classes, investors with a substantial corpus may park their money in private equity investments to get potentially handsome returns in the future.
While investors’ returns are far higher than the returns offered by the equity markets, it requires a large investment upfront and a much longer investment horizon. Let’s not blind ourselves to the risks either. The risk is multifold as the investor’s returns are pegged to the decisions of the management of the company and the success of the business that one has no control over.
Institutional and high net worth investors may allocate a part of their investments to private equity, which private companies may then use to fund their expansion, make acquisitions, boost business, and help in overall business and economic growth.
Private equity market in India
Private equity market investments in India are at a record high, with private equity and venture capital in the country crossing the $232.4 billion mark in 2020, as per EY sources. Last year alone witnessed private equity investments worth $62.2 billion, including $26.5 billion private equity investment in Jio and Reliance Retail despite the pandemic related uncertainties, according to multiple media reports.
India remains a fertile land for emerging businesses, inviting capital, funds, and massive stimulus programs in pharmaceuticals, telecom, banking, healthcare, IT, financial services, and e-commerce.
How does private equity work?
A group of private equity investors or a private equity firm raises a capital pool by forming a private equity fund. The fund is then invested in a particular company or a group of companies that promise growth.
The idea is to inject immediate capital into financially distressed companies or companies that require funds for expanding or for regular operations. However, since the company shows potential to override its financial setbacks, an influx of capital can help them get back on track. This is where private equity investors jump in.
Ultimately, private equity investors aim to gain returns from their investment in the company as their operations improve and the company starts making money. However, the investors are generally not involved in running the company or making business decisions. They might
provide advice to the company’s management and help draft strategies.
After the company overturns its fortunes, the private equity investors can exit with their returns.
Thus, private equity investments allow high net worth individuals to tap into the potential of equity markets. Private equity is also a great investment option for investors with extra corpus to diversify their investment portfolio and venture into a highly profitable asset class. Additionally, private equity investment allows a few investors to be a part of companies that show promise, growth, and potential.