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Private Equity in India: A Closer Look at its Meaning, Types, and Working Structure

Private equity investment aims to make good profits for investors by buying ownership in companies.

Private Equity Meaning and Introduction

Private equity investment is an alternative form of investment that includes putting money into privately owned businesses in return for a share of ownership. Unlike investments in public companies, private equity investments are made in companies not publicly traded on stock exchanges and not available to the general public.

Private equity investors, often known as private equity firms or investors, typically consist of institutional investors such as pension funds, endowments, foundations, insurance companies, and high-net-worth individuals. These investors put their money together to create investment funds. These funds are managed by professional investment experts called General Partners (GPs).

Private equity investment aims to make good profits for investors by buying ownership in companies. The investors also get involved in managing and running the companies to help them grow and make more money.

Private equity firms, with their strategic investment approach, play a crucial role in this process. They work closely with company management to develop and implement strategic initiatives aimed at creating value, underscoring the importance of their involvement in the investment process.

What are Privately held companies or Private Equity Companies in India?

A privately owned or non-public company has shares and related rights or obligations that are not available for public investment or publicly traded in the listed stock exchanges. A privately held company is a business organisation in which private investors have ownership of the shares.

Types of Private Equity in India

Private Equity in India can be broadly classified into the following types, as mentioned below:

Venture Capital

Venture capital, usually provided to start-ups and early-stage companies, is a form of private equity funding. VC is typically offered to firms that show significant growth and revenue generation potential and aim to achieve high returns.

How Does Venture Capital Work?

VC investors invest in a company until it reaches a significant position and then withdraw their investment. Ideally, investors provide capital to a company for 2 years and earn returns for the next 5 years. Expected returns can be as high as 10 times the invested capital.

Financial venture capital can be offered by:

– Venture capital firms that create funds using money from other investors, companies, or funds. These firms also invest from their funds to demonstrate commitment to their clients.

Who are Venture Capitalists?

Venture capitalists invest in early-stage companies with promising futures. They can be individual investors or a group of investors who join through investment firms.

When Should a Firm Go for Venture Capital Funding?

During the expansion stage

If you plan to expand your business, seeking funding through venture capitalists is a good option. This can help you benefit from their business, financial, and legal expertise, typically needed during business expansion.

Strong mentoring requirement

A venture capitalist provides expertise, knowledge, and networking in addition to capital investment. You can use their guidance to develop your network, promote your business with their direction, and ultimately take it to greater heights.

When facing competition

Once a start-up has gained substantial market reach and is likely to face competition, it is the right time to seek venture capital funding to survive and compete effectively.

Buyout Funds

They are a type of Private Equity Fund where there’s an acquisition of a controlling interest in a company, often referred to as an acquisition. Buyouts can be management buyouts if the firm’s management buys the stake or leveraged buyouts if high debt levels are used to fund the buyout. Buyouts often occur when a company needs money through private investors.

Buyouts occur when a buyer acquires more than 50% of the company, leading to a change of control.

Investment funds and individual investors actively search for underperforming or undervalued companies in private equity. The goal is to acquire these companies, take them private, and then work on improving their performance and value before eventually taking them public, typically several years later.

Buyout firms play a key role in this process, as they specialise in acquiring a controlling stake in a company and restructuring its operations.

They often use a strategy known as a leveraged buyout, which involves financing the acquisition with a significant amount of borrowed money.

Growth Capital

Growth equity, or growth capital or expansion, represents an investment opportunity in established companies experiencing a significant change in their lifecycle and with the potential for substantial growth. 

Uses of Growth Equity 

Businesses use growth capital to finance the expansion of their operations, entry into new markets, and acquisitions, which enhances the company’s revenues and profitability.

Investors in growth equity have the potential to gain from the high growth prospects and manageable level of risk associated with these investments.

Growth equity transactions typically involve minority investments and commonly utilise preferred shares. Growth equity investors tend to select companies with minimal leverage or no debt. 

The typical investor profiles in growth equity encompass private equity firms, late-stage venture capitalists, and investment funds (mutual or hedge funds).

Mezzanine Finance

Mezzanine finance is a form of funding between debt and equity and is often used to support companies during their expansion phase.

It is a type of private equity investment that can be structured to include both debt and equity components, offering companies considerable flexibility. Mezzanine finance is commonly utilised to fuel growth strategies, including funding for acquisitions and other expansion initiatives.

Investors can convert their rights to shares if the company cannot pay its debts, which some experts refer to as ‘cheap equity’. Companies choose mezzanine capital when they can’t borrow more money or want to keep their ability to borrow in the future.

Mezzanine capital is an option for companies that need immediate funds. It’s more expensive because companies have to pay a higher interest rate than a bank loan. It’s costly, but it doesn’t lead to as much dilution of ownership.

Working Structure or how does Private Equity work?

Raising Funds

Private equity firms engage in fundraising activities to secure capital from various sources, including institutional investors such as pension funds, endowments, other financial institutions, and high-net-worth individuals. The firms then use this capital to invest in private companies, aiming to achieve strong returns for their investors.

Deal Sourcing   

Private equity companies discover potential investment opportunities through different means, such as networking, industry analysis, and exclusive deal pipelines.

Due Diligence  

Thoroughly investigate potential target companies to evaluate their financial condition, growth opportunities, market standing, and potential uncertainties.


Establish the fair market value of the target company by considering its financial performance, potential for growth, similar transactions, and market conditions.


Make agreements on the conditions of the investment, such as the buying price, ownership share, authority privileges, and possible alterations in management.


Finalise the investment agreement and offer funds to the company in return for a share of ownership.

Operational Improvement          

– Collaborate with the portfolio company’s management team to execute improvements in operations.

– Engage in implementing strategic plans and cost-saving measures alongside the portfolio company’s management team.

Value Creation 

Enhance the profitability, growth, and market position of the portfolio company by implementing strategies to create value, to increase the company’s overall enterprise value.

Exit Strategy      

Determining the best way to exit the investment is crucial, and options to consider include selling to a strategic buyer, or a secondary buyout.

Exit Execution   

Carry out the selected exit plan to divest the ownership share in the portfolio company and actualize investment gains for the private equity firm and its investors.

Frequently Asked Questions (FAQs)

Are Angel Investors part of Private Equity Investors?

Yes, Angel investors are a type of Private Equity Investors and they typically fund early-stage startups in exchange for ownership equity or convertible debt. Their support often includes financial aid as well as mentorship and guidance.

Who regulates the Private Equity investments in India?

Private Equity funds are classified as Level II Alternative Investment Funds (AIFs) as per the regulations set by the Securities and Exchange Board of India (SEBI). These funds operate under specific rules and guidelines established by SEBI, which outline the framework for investing in private equity.

Are Non-Resident Indians (NRIs) allowed to invest in private equity in India?

SEBI permits Private Equity funds, classified under Alternative Investment Funds (AIFs) to gather capital from various types of investors, including Indian, foreign, and non-resident Indians.

What amount of money is required to invest in private equity in India?

SEBI says that the minimum investment amount is set at Rs one crore. However, if the investors are employees or directors of the AIF, the minimum investment value decreases to Rs. 25 lakhs.

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Disclaimer: Investing in the Equity market in India is subject to risks, i.e. the market keeps on fluctuating. This article is purely for educational purpose. The views expressed and data provided here are by Equitypandit’s team. Kindly do not completely depend on the information provided as the risk appetite differs from individual to individual and there are various other factors in the market to determine the factors to invest in the market.

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