Private Equity As a High-Risk High-Reward Asset Class
FOR ISSUER:
Private Equity is a source of finance for a company which intends to raise risk capital from the investors. Issuer will issue common shares which have voting rights and right to receive equity dividends. These instruments are last in the queue of repayment, in case of winding up of the company. If you are looking for private equity firm in Mumbai, keep reading this article for better information on private equity and details of relevant company offering the corresponding PE (Private Equity) services.
FOR INVESTOR:
For qualified investors, private equity is a high risk-high reward kind of an asset class. Since they get common shares and stand last in the queue on winding up, they take maximum risk. Hence, SEBI (Securities & Exchange Board of India) does not allow all category of investors to invest in private equity.
POOLS OF PRIVATE EQUITY, MANAGED BY PROFESSIONAL FUND MANAGERS:
To hedge against the risk of loss, the quality of companies chosen, the entry price, the exit price & the exit route becomes critical for a private equity investor. Hence, many a times, a pool of private equity investors come together and hire a professional investment manager to invest on their behalf. The concept is similar to mutual fund however, here the investors have more say in the activities that a fund manager carries out.
STAGES OF PRIVATE EQUITY:
For the issuer, the private equity investment comes mostly in four to five stages:
- Angel Investment: in this round, preferably known as the first round, an investor funds an idea. Here the business owner is yet to start the actual business. This round is small one compared in size and the exit for the investor is quick.
- Seed Stage: When the business has started, the proof of concept is established and there are a few customers to make the cash register ringing a seed level private equity investor will give exit to angel and step in with more money and time.
- Series A: Series A will retire the seed investor and business now enter the growth stage. Here the magnitude and stakes are high. Investor also seeks review and control over strategic decisions of the company.
- Series B: This stage comes when business goes national and is run like an organised corporate where there are structures and processes that govern the enterprise. Media starts looking at business in this stage and key decisions start getting reported in Media.
- Series C: The corporate now goes global to become a multi-national. Large amount of money is required and many time consortium of private equity players chip in to take whatever small piece of a large pie that they can get their hands on.
6. IPO (Initial Public Offering: This is not actually a stage of private equity. This is the step at which all private equity investors get an exit. Not all companies reach this stage. One in ten thousand would make it till here.
For the fund manager of private equity, because of the inherent business risk, in the companies that they invest, there are bound to be losses. Hence, they go by what is called 2/10 principle (2 by 10). This principle states that eight out of every 10 investments made will go down. But the two, which come up will make good all the losses suffered in eight and give much more to grow and nurture the fund further.
At ProBizAdvisor.com, we are one of those private equity offering firms in Mumbai. Besides helping to raise funds for a variety of businesses and start-ups, we also provide outsourced CFO services, i.e., help in setting up business strategies, performance reviews, systems as well as risks assessment.
