The private equity market saw exponential growth in 2021 with a $1.1 trillion buyout according to a report by Bain and Company. The COVID-19 pandemic acted as a catalyst and led to a surge in deals and a growth in equity and venture capital.
Private Equity, also known as PE, is a broad range of funds that help investors collectively increase their purchasing power. Private equity funds are unlike mutual funds as they do not deal with shares traded on active public securities exchanges. On the other hand, private equity funds involve investors who hold shares privately on non-traded funds.
In India, the first eight months of 2021 saw about two dozen unicorns according to the Hurun India Unicord 2021 report. India is home to the third largest start-up ecosystem in the world with an annual growth rate of 12-15%. According to a PwC report, 710 deals took place in the first half of 2021, amounting to $40.7 billion. This included both private equity and strategic acquisitions.
Today, India’s private equity market is at a record high, surpassing the $232.4 billion mark from 2020 according to a report by EY. India’s fast-paced economic growth in various fields like e-commerce, healthcare, IT, financial services, telecom etc has surely led to an in-flow of capital, stimulus and funds.
Some reasons as to why companies might want to seek private equity funding include buying out a founder. At times an owner-founder can be bought out while retaining existing investors. This can also be made possible when employees partner with a private equity fund to kick off a management buyout. Private equity funds are more likely to cash out a founder if a controlling stake is available.
They can also buy 100% of the outstanding shares, cashing founding shareholders and existing investors. Such buyout funds could lead to a whole new senior management or retain the founders to manage the business. Additionally it is not just business owners that private funds can buy out. Older investors who have had their money tied up for more than five years in a privately held business usually like to sell their holdings to private equity players. And if the company has a bright future prospect private equity investors would be more than willing to buy out existing investors
On the whole, cash-rich private equity funds usher in certainty for business owners with cash infusions. And this can especially be a new lease of life for a business whose owners have already exhausted their personal and business assets in keeping the business going. This leaves very little resources to improve business performance, research and development and steps to overcome competition. In such cases cash infusions allow businesses to improve performance by funding acquisitions, developing product lines and facilitating geographic expansions.
At times private equity funds can go towards recapitalising businesses in distress. These are called ‘recap’ funds, where private equity funds see potential in a collapsing business and recapitalise and restructure the organisation. When a private equity fund is utilised towards recapitalising, fund managers more often than not do tweak the business plan and relook at the management team to improve revenue generation and profitability.
According to a study by the Boston Consulting Group, ⅔ of private equity deals resulted in a 20% annual growth for companies and about half of the companies surveyed realised minimum 50% of their annual profits. Zooming out a bit, over the last 20 years, in the US alone, private equity has outperformed stocks by 4%. It is no surprise then that business owners are moving towards private equity funds to do wonders for their business.
If you are interested in investing in unlisted shares, get in touch with Unlistedkart. We’ve created a vast ecosystem of pre-IPO and new-age companies for HNI, investors, and retailers to create wealth. And if you are a company seeking liquidity for ESOPs, we could add you to our network of potential buyers to help you grow your business.