Private Equity Fund

The year 2025 could be an exciting one for India’s private equity (PE) and venture capital (VC) as they show strong momentum and cautious optimism. In 2024, over US$56 billion flowed into sectors like tech, real estate, infrastructure, and financial services.

With interest rates expected to decline in 2025, yield-driven sectors like infrastructure and real estate are attracting attention. In a volatile yet opportunity-rich environment, private equity is in a good position for a dynamic year ahead.

Let’s understand private equity fund meaning and how they are structured. 

What is a Private Equity Fund?

A private equity fund is a shared or collective investment scheme that invests across equity and debt instruments. Investors of PE funds directly invest in private companies. It is an alternative investment option for HNIs and institutional investors. Thus, instead of investing in conventional assets like stocks, bonds, gold, real estate, government securities, etc., they can explore private equity funds. Since a private equity fund invests in companies that have a good potential to scale up, the prospective returns can be higher.

Private equity capital doesn’t trade on the stock exchange. Thus, the fund is not open to every individual for a subscription. This type of investment follows general investment criteria or particular investment criteria that are specific to an industry.

A private equity investment fund requires a higher investment amount, and the holding period is long-term. 

The average tenure of private equity investment funds is between 5 to 10 years and also gives an option for an annual extension. After the tenure, the fund is closed, and the funds are returned to the partners. A group of investment experts from a private equity firm raise and manage the funds. They use the funds for large-scale purposes like making acquisitions, raising new capital, funding new technology and start-ups, investing in other private companies, etc.

Private equity fund accounting typically involves tracking capital commitments, investor distributions, and internal rate of return (IRR) over the fund’s lifecycle.

Different Private Equity (PE) Investment Strategies

The following are different types of private equity fund structure or say investment strategies:

Venture Capital

The term ‘venture capital’ refers to a fund that makes investments in start-ups and small businesses with little or no access to external financial markets. These new businesses are typically only getting started, but they have great growth potential in the near term. VCs are a popular source of capital for start-up businesses that have promising growth and innovation. They don’t have any debt, and when the business is right, the returns can be significant. 

Growth Capital

Growth capital funds private companies that lack the necessary assets. These are businesses that are unable to expand further using traditional finance methods because they lack the necessary assets.

Leveraged Buyouts

Leveraged buyouts differ from venture capital funds. In leveraged buyouts, the fund makes investments in larger businesses with added leverage (stake holding). Furthermore, compared to VCs, more money is invested.

When a business borrows a sizable sum of money in the form of loans and bonds to acquire another business, the transaction is known as a leveraged buyout. The goal of owning a significant share in a business for the long term is to manage the finances of the business to produce a sizable return. The PE companies reduce their interest once a reasonable value has been created and exit the company.

A leveraged buyout uses debt to pay for the acquisition. Only a small portion of the financing must be provided by the company carrying out the LBO (usually, debt financing accounts for about 90% of the cost).

A leveraged buyout’s investment goal is to produce returns greater than the interest on the loan incurred. This is an excellent way for the company doing the LBO to produce big returns with little cash at risk.

Turnaround Situations

When a business can’t pay off its existing debt, private equity capital can be a crucial source of funding. In this situation, the fund capital may be used, along with management-led turnaround measures, to stabilize the company’s balance sheet.

Final Thoughts

Though, private equity in India is set for a positive year, these funds require a long-term view, high capital commitment, and the capacity to survive risky environments. 

Knowing the structure and approach of private equity is important for those interested in accessing this alternative investment source.

FAQs

1. What is the difference between Private Equity, Venture Capital and Hedge Funds?

Private equity funds put their money directly into businesses by providing funds to private companies to fund their financial obligations and be part of the growth story.
Venture Capital is a type of private equity and a type of financing where new businesses and small businesses get access to finances. 

Hedge funds are a kind of alternate investment that uses pooled money and different strategies to make money for their investors.

2. Can individuals invest in private equity?Mostly, accredited investors and qualified clients are the only ones who can invest in a private equity fund. Institutional investors like investment banks, public and corporate pension funds, endowments, insurance companies, foundations, wealthy families and high net-worth individuals can invest in PE funds.