Companies which are in need of equity can raise through private equity (PE). PE is a form of financing in the form equity by high net worth individuals or institutions invest in fast growing companies, stressed assets, in leveraged buyouts of companies, to fill the gap in equity portion or to strengthen the financial statement which have good potential for turn around.
The securities of these companies, that accept private equity unlike public Ltd companies are not listed in stock exchange or traded either. The income for PE investors is through management fees and performance fees once the company achieves good sales and profits or in case of turnaround growth of the company. Generally PE investment companies maintain portfolio of investments in divergent companies.
Benefits of PE
There are several benefits of PE funds to a company such as access to liquidity, no constant pressure from the investors for publishing quarterly earnings and outflow of cash to meet dividend requirements etc.
Private Equity and Venture Capital
Normally the PE investors prefer investing in companies where new technology is involved or in start-ups on long term basis where the risk component is high returns are substantial if the project is a success. These funds are on similar lines of Venture Capital (VC), help the company to grow and reap benefits after few years when the companies go public or merge with other firms. However, the major difference between PE and VC is that PE invests both in start-ups and matured companies unlike VC which invest only in start-ups. PEs also invest in REITs, funding in real estate, and also in Venture Capital funds.
Success and Failure of PE Partnership
Lot of patience is needed by the company which seeks PE partnership. The company should understand the motives and intentions of the PE investor. There has to be a trust and mutual clarity amongst the partners. Global PE firm KKR has taken 2.32 % stake after investing $1.5 billion in Jio Platforms and 1.28 % in Reliance Retail Venture by investing $754 million.
Yogendra Vasupal, Rupal Yogendra, and Sachit Singhi with $ 33.5 million funding started home stay network Stayzilla in India in 2014 and very soon turned out to be the largest homestay network in India. However, the concept was way ahead of its time when launched, as people were not ready for such Hi-Fi technology. By 2017 the firm closed its operations as they could not get further funds.
PE in India
India experienced a 33 % jump in PE based on YoY basis touching $ 27.5 billion for the period January to June 2021. One factor for this growth is that many firms have raised funds from both foreign and domestic investors and the deal sizes are substantial.
Tata Motors looking for a PE partner
Tata Motors in the process of high growth trajectory in the next ten years is on the lookout for partners especially PE investors for its passenger vehicle segment especially for its EV (electric vehicle) segment. The investments is likely to be in new technology. In this process, the company has planned to carve out the Passenger vehicles as a separate segment on standalone basis and necessary approvals have been obtained from the Board and shareholders as per the company officials during October 2020 and not much developments are seen till June 2021.
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Looking at the success of PE investments, can it replace the traditional IPO route in the long run?