Things that you must keep in mind before investing in a Private Equity Firm

1. Things that you must keep in mind before investing in a Private Equity Firm

2. If, as an investor, you look at the public market, you would find that its popularity has ceded out of late. • It is primarily for this reason that so many investors these days are opting for PE (private equity) investments. The COVID-19 outbreak affected the economy.  • Thanks to the humongous slowdown, the PE firms had to come up with fresh ideas, perhaps to stay afloat. In much the same way, these companies also had to overcome several obstacles placed in their path. • It means that now as an investor, you need to be careful when investing in these companies.

3. The appropriateness of the fee • When you are investing in Investment Management Companies, this is the first thing that you need to keep in mind. • You have to understand that you have to pay a management fee when investing in such a fund, and that fee usually tends to be in the region of 2% of the total sum you are investing in a year.  • When compared to passive public funds, this is a bit higher. The main reason is that PE managers are earning a higher fee. Yet another significant area of difference between PE equity and public funds is the carried interest.  • In the case of private equity, you have an interest of almost 20% of the fund’s profit. 

4. Liquidity tolerance and duration of Investment  • It is a critical factor to be cognizant of while putting your money in Private Equity Funds in India. As an investor, you need to understand, unlike the public market, your capital would not be invested straight away. • In this case, the fund manager would analyze various companies before buying a stake.  • It is when the fund cycle ends – this means the funds are recapitalized or sold – you would be paid back handsomely. It could take a long time, so you need to be patient.

5. Process of allocation  • Most investors think that assets are allocated based on certain predetermined classes. So, the primary categories are private equity, public equity, private debt, and public debt. • We cannot say this is the wrong approach. However, it would be much better, if you looked at private drawdown strategies as a part of equity vs. real asset vs. credit exposure. 

6. Conclusion  • Apart from these, it is crucial to research the options you have. You need to have at least a fair idea of how the market is doing before investing over here. • As an investor, you need to understand the risks of such investment and know that your money could be locked up for a maximum of 10 years before you invest in PE. • If these do not bother you, PE is a great investment avenue for you. 

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