What is Private Equity?
When it comes to investing, most of the investors opt for the traditional route. They invest in bonds or stocks or purchase mutual funds. While for some others, private equity is an appealing investment option. But what is private equity fund and what is the private equity fund structure? How can one invest in it?
In this article, we explain private equity fund meaning in depth to give you a better understanding of the concept.
What is Private Equity Fund?
Private equity is a general term which describes different kinds of funds pooling money from several investors to acquire stakes in companies. Such a private equity fund may amass millions or even billions of dollars to directly invest in companies. These companies are not publically listed on the exchange or traded. So, a private equity fund either directly invests in private companies or engages in buyouts of public companies, resulting in the delisting of public equity.
Private Equity Fund Structure
A private equity fund comprises of Limited Partners (LP) who own 99 per cent of the shares in a fund. They have limited liability. The remaining 1 per cent is owned by General Partners (GP) who have full liability. They are responsible for executing and operating investment.
Understanding What is Private Equity
Private equity involves investing in unlisted companies at different stages of their development. This is done with the objective of creating an added value to these companies. After some years, such companies can be sold with a significant capital gain. Simply put, private equity funds are created with the intention of raising money from several investors to deploy it progressively by acquiring companies and helping them grow more profitable.
Since private equity investment directly invests into a company, it requires a large capital outlay to gain a significant level of influence over the company’s operations. This is why not every investor can afford to invest in private equity. The minimum amount of capital required varies depending on the fund and the firm. Some funds have a $2,50,000 minimum investment requirement, while others can run into millions of dollars. Therefore, most of the private equity firm industry comprises of large institutional investors such as pension funds. Or, they may be funded by a group of accredited investors.
How Does Private Equity Work?
Private equity firms raise money from accredited investors and institutional investors to invest in companies through the following investment strategies:
• Distressed Funding
This is also known as vulture financing. In this type of private equity funding, the money is invested in troubled companies with underperforming business assets or units. The funding is aimed at making necessary changes to the operations or management for a turnaround of the company. This could mean selling their assets for a profit ranging from patents to real estate and physical machinery. Mostly, companies that have filed for bankruptcy fall in this category and require this type of funding.
• Leveraged Buyouts
This type of private equity funding is the most popular investment strategy. Here, the private equity firm buys out a company completely with the objective of improving its financial and business health. Later, the company can be sold at a profit to an interested buyer or made public by conducting an Initial Public Offer. The firm uses debt as leverage to buy out the company so it does not have to spend the purchase price at once. The money from various investors can be used to improve the company’s earnings and create a higher return.
• Funds of Funds
As the name suggests, this type of funding invests in other funds, typically hedge funds and mutual funds. The aim of the FOF strategy is to achieve broad diversification and minimal risk. For an investor who cannot afford the minimum capital requirements in such funds, FOF serves as a backdoor entry.
• Venture Capital
Venture capital investments focus more on investing in newer companies or startups that are on the verge of developing a new technology or industry. This type of funding can be done at different stages of a company. For example, seed financing funds a company to scale an idea from its prototype stage to the development of a product or a service. Similarly, an early stage financing can assist the entrepreneur in helping his company grow. Or, Series A financing which can enable an entrepreneur to actively compete in a market or create one.
Advantages of Private Equity
Private equity offers multiple benefits to startups, businesses and companies. It provides them access to liquidity instead of having to rely on traditional forms of financial mechanisms such as listing on public markets for funding. Another huge advantage of private equity funding is that companies can operate away from the glares of public markets. They are not required to submit quarterly reports to the outside world and can undertake a long-term approach in bettering their fortunes. Certain forms of private equity financing such as venture capital funding can be ideal for early stage companies who do not wish to take high business loans.
What are Some Myths Regarding Private Equity Firms?
Here are some myths surrounding private equity firms which are not true.
• Private Equity Firms Strip A Company’s Assets
Many analysts believe that private equity firms are able to turnaround a company by stripping it of its best assets. In reality, private equity firms have been known to create added value to a company by expanding their geographical footprint. Or, acquiring and integrating smaller competitors, and repositioning an out-of-date concept into a trendy product.
• Private Equity Firms Cut Costs
Private equity firms do cut costs, but only the unnecessary ones with a view to reinstating the money into other functions. For example, research, marketing, sales, and more. This can help support the company expansion with a lesser capital outlay.
• Investor’s Money Is Blocked For 10 Years
Growing companies can take time. Thus, investments made into private equity funds are generally seen as long-term or illiquid. However, it is not rare that a company can be sold off after a 4 or 6 year holding period. Private funds usually have a 10-year maturity, but it is possible that all the money gets invested in the first 5 to 7 years of the fund's life.
Private Equity Fund v/s Other Kinds of Equity
Private equity is not traded on public exchanges whereas equity through stocks is publically traded. In addition, private equity firms only invest in failing companies that need a turnaround or strong performing companies that can further improve margins and efficiency. For other kinds of equity, investors can invest in all types of companies.
Private equity firms are attractive investment vehicles for institutions and wealthy individuals. Private equity operations at IndiaNivesh Ltd. are aimed at creating value for our investor clients seeking growth opportunities in unlisted businesses at an early stage. You may get in touch with our team of highly-knowledgeable fund managers to know more about investing.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Introduction to Share TradingAs a concept, Share Trading is considered to be reserved for the Wall Street professionals and many people believe that it’s best to stay clear of it. However, the truth is, share trading is a well-researched and disciplined technique of investing which is quite simple, provided the share trading basics are right. So, yes, it is for everyone and you can start at a very slow pace and learn the tricks of the trade while investing yourself!Let us see a few key things so that you can start by yourself.What is Share Trading?Share trading is the basic process of buying and selling of stocks of a company either in the primary market, i.e. from the company directly or through the secondary market, i.e. a stock exchange, like NSE or BSE. When a company issues its first set of shares, they issue an Initial Public Offer (IPO) for the people to buy the shares of the company directly. Thus, an investor becomes an owner of the company, proportionate to the value of the shares as compared to the market value of the company. After purchase, the shares need to get listed on either of the stock exchanges like NSE or BSE (explained below) for the investor to trade in them. Benefits of share trading:There are certain distinctive benefits of share trading like:1. Growing your money over time and earning profit2. Beating the inflation3. Earning dividend4. Portfolio diversification5. Ownership of a company, by buying shares of that company. However, share trading has its own risk of the assets being volatile in nature and that affects the share prices. With good share trading tips, you can learn the methods to earn maximum profits and minimal risk in share trading.Share Trading BasicsLet us start with the basics of share trading. We will first know about the share market and stock market.o Share/Stock MarketThe share market deals with the buying and selling of shares. The Stock market is similar to the share market but in addition to shares, bonds, mutual funds, other derivative products are also traded here. Share markets are of two types i.e. Primary Share market where a company can get itself registered to issue shares for the public and Secondary Share market where the trading is carried out via a stockbroker. o Stock ExchangeShare trading takes place at the Stock Exchange where a lot of companies are listed. All major Indian companies are listed on The BSE and NSE i.e. The Bombay Stock Exchange and The National Stock Exchange. Both the stock exchanges have the same process for functionality and the same settlement procedure. o Market RegulationCertain regulatory bodies in India are responsible for regulating the share market. Let us list down the regulators in the stock market of India.• Ministry of Finance• Securities and Exchange Board of India (SEBI)• Reserve Bank of India(RBI) The Securities and Exchange Board of India (SEBI) was established in the year 1988. It is a non-statutory body regulating the share market in our country. Its main objective is the protection of the interest of the investors and the development of the capital market according to certain rules and regulations. o Depository Participant(DP)A depository can be defined as an organization or body which holds shares, bonds, mutual funds, etc. of the traders. Two main depositors in our country are National Security Depository Limited (NSDL) and Central Depository Services Limited (CDSL).A depository participant (DP) is an intermediary or an agent via which the traders make their requests to the depository. These depository participants are appointed by the depository to provide their services. For example, banks and financial institutions are the depository participants. Trading mechanism o Share trading at both The BSE and NSE takes place with the help of an electronic limit order book. This book is a record of all the limit orders that are unexecuted and are being maintained by a share trading specialist. When the buy and sell limit orders for a share are given, the specialist will keep a track of all these orders in the limit order book and will execute them when the appropriate pricing is available. o The procedure is order driven and no human intervention is involved. When the market orders are placed, they are automatically matched up with the best available limit orders. o Mostly all orders are placed via stockbrokers in the trading system. The stockbrokers provide an online facility to the customers by which orders can be placed. Since the entire trading mechanism is order-driven, the buyers and sellers are not revealed. As a result, there is more clarity in the whole process of displaying the buy and sell orders in the system. Market Indexes The two major stock market indexes are Sensex and Nifty. Investors usually tend to follow the market indexes to keep track of the movements or changes in the market. A market index can be defined as a theoretical or hypothetical aggregation of several investment holdings. These holdings represent a portion of the financial market. Sensex consists of the 30 most frequently traded stocks on the Bombay Stock Exchange. Sensex is the oldest stock index in India and was started in the year 1986. Nifty comprises of the 50 largest stocks of the National Stock Exchange. The companies need to meet specified terms of capitalization and liquidity to be included in these indices. How to start share trading? Let us have a look at the basic steps involved in how to start share trading for beginners. Firstly, you need to find out a stockbroker or a firm. Stockbrokers are of two categories i.e. full-service stockbrokers and discount stockbrokers. As the name suggests, a full-service stockbroker will provide you with numerous services starting from share trading to financial planning. Discount brokers will charge lower fees and will provide only the minimum share trading facilities. You need to scrutinize all the options wisely. Then, you need to fill up the account opening form and the KYC form. You can do this by visiting the nearest office of the broker. Along with the forms, you will need to submit certain documents like Voter ID card, PAN card, passport, etc. for identity and address proof. You can also open your share trading account online by visiting your stockbroker's website. Which shares can you invest in? Since now you know about how to do share trading, it’s time to know about the correct place of investment. In the stock market, you will find a lot of leading companies whose shares are available for trading. Now, you might be in a dilemma regarding the decision about which shares to trade? This choice of shares for trading completely depends on a trader’s personal preferences. Usually, for beginners, it is always safe to start with shares of those companies which they know very well or can get information easily if they want. Later on, after gaining some experience in on how to do share trading, you can start trading in a large variety of shares basis your thorough research & analysis. Share Trading Tips Let's discuss some share trading tips which can be of great use for beginners.o Educate yourself about the stock market, benefits of share trade, which investment would be profitable for you, etc.o Start practicing by using an online simulator as this would help you understand the working process without any risk.o Make a proper plan on your amount of investment and the period to hold the investment.o Take help from a mentor who has fair experience in the world of share trading.o Register into online sessions on stock broking, share trading for more knowledge and learning. Share trading is not very difficult but can be mastered with time. For beginners, it is always advisable to take help from experts like IndiaNivesh who not only know the pulse of the market but also have immense experience to give the best advice. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Portfolio ManagementIndia today is home to many successful businessmen and high salaried corporate individuals. With increasing income levels, there is a need for lucrative investment avenues for high net worth individuals to earn good returns on their investment corpus. High-income individuals especially those with limited financial knowledge turn to portfolio managers to manage their investments more profitably. Now, what is portfolio management? Portfolio management involves prudently managing one’s investments, ensuring the right mix of investments which are regularly monitored and adjusted to earn a maximum return. Portfolio management services involve the application of investment strategies by expert fund managers to the investment portfolio of its client with the intent of maximizing returns within the acceptable risk level. Portfolio managers earn a commission which can be in the range of 3 to 5% of the portfolio value for undertaking these services. In India, portfolio management services are mostly opted for by HNIs as portfolio managers require a minimum investment commitment of INR 25 lakhs.The key to portfolio management services is that the entire responsibility of investment portfolio management is handed over to the portfolio manager. The portfolio manager, generally a domain expert undertakes all the required stock research and continuously monitors the investments. The portfolio managers take investment decisions in line with the investor’s goal and keep them updated about the developments in their portfolio. Objectives of Portfolio Management ServicesThe major objectives of Portfolio Management can be listed as below.o Customization of the investment portfolio of the HNI client, which is not possible for other investment options like mutual fundso The flexibility of choosing your own stocks as compared to mutual funds, which depends on the fund manager's discretiono Transparency of the costs and the fees along with the charges for the portfolio management servicesNeed for Portfolio Management ServicesAfter knowing about portfolio management meaning, let us have a look at why portfolio management is important in investments. o Extensive Research & ExpertisePortfolio management services are provided by professional and expert portfolio managers. Backed with years of expertise and detailed research on the market and specific stocks, they are in a better position to optimize the mix of stocks. This level of expertise is unlikely to be available to an individual and thus it can be more beneficial. o Continuous monitoringPortfolio managers are entrusted with the responsibility of the investor’s portfolio and are dedicated to growing the investor’s corpus. They continuously monitor the market trends as well as its impact on the investor’s portfolio and take timely decisions to maximize returns or minimize losses. This type of dedicated monitoring is difficult to achieve at an individual level. o Provides a customized portfolio for high net worth individualsPortfolio managers do not have a ‘one size fits all’ approach. They consider the specific investment goals of each investor and tailor make the portfolio mix to suit the investor. Investor’s need not worry about whether their portfolio is aligned with their goals as portfolio management services take care of this aspect. o Generation of better returnsThe cumulative effect of the above factors results in portfolio management services having a greater potential to earn higher returns as compared to what an inexperienced individual investor may be able to achieve on his own.Understanding Portfolio Management ServicesWe covered earlier about the portfolio management meaning. Now, the main objective of portfolio management is to design investment strategies that give maximum returns at a nominal risk level. Now, let's look at the portfolio management process. The portfolio management process is a continuous process and not a one-time act. Let us have a look at the steps involved in the Portfolio Management Process. o Security AnalysisThis is the primary stage of the process. Here, the major task is to identify the risk factors and the returns expected from the securities. These should match up with the investor’s long term financial goals and their risk enduring capability. o Analysis of the PortfolioOnce the risks and securities are identified, a large number of portfolios can be created. These portfolios are known as feasible portfolios. o Portfolio SelectionOut of all those feasible portfolios that are created, the portfolio manager will select the ones which are the most suitable for the investors. o Portfolio RevisionAfter portfolio selection is done, the portfolio manager and his team will keep a close eye always on the selected portfolio to make sure that no opportunity for obtaining a maximum return for the investor is missed. o Evaluation of portfolioHere, in this phase, the portfolio is assessed periodically to find out the return that has been obtained from the portfolio against the risk that is involved. Here, if there is a necessity for making some changes into the portfolio, it is implemented to minimize risk and optimize return.The Key elements of Portfolio ManagementLet us have a look at the key elements of portfolio management. One of the major key elements of investment portfolio management is customization. Those investors who are not very aggressive can add more stable investments into their portfolio. On the contrary, investors having an aggressive profile can add up volatile investments into their portfolio Portfolio management requires fundamental analysis. This analysis helps to identify the selection of stocks that can meet the investment goal. Fundamental analysis involves assessing the financial position of the company Portfolio management also involves undertaking market research and determining risk factors that have an impact on the market and the stocks in the portfolio. Being updated with changes in these risk factors and managing the portfolio to mitigate these on time is key Successful investment portfolio management necessitates continuous monitoring of the market and performance of the portfolio relative to the market. A pro-active approach in this regard can help make timely decisions to maximize profits in a bullish market and minimize losses in a bearish market While these are some of the standard elements and steps involved in portfolio management process, it may vary from one company to another.Types of Portfolio ManagementPortfolio Management can be further classified into Discretionary Portfolio Management and Non-discretionary portfolio management. In discretionary portfolio management, the portfolio manager has the complete authority to take all decisions on behalf of the client. The Portfolio Manager is responsible for taking care of the financial objectives of the client, carrying out documentation and filing tasks as well. Non-discretionary portfolio management is somewhat different from discretionary portfolio management in terms of discretionary powers. Here, the portfolio manager can give suggestions and advice to the investor on investment strategies. However, the final decision is taken by the investor himself. Portfolio Management brings a lot of benefits to the investors but at the same time has certain pitfalls as well. If you select to opt for portfolio management for your investments, then it is inevitable that you keep your investment goals and level of risk exposure clear with the portfolio managers. This will be the main factor influencing your returns and your investment strategy. Experts at IndiaNivesh will provide the right advice keeping your risk-taking ability and goals in mind and thus, giving you a well-balanced portfolio.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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