Private Equity Compare

Additional Useful Information

• Suitable for investors who have a high-risk tolerance and have lots of excess capital. It is also recommended that only experienced investors invest in private equity.

• Private equity funds are typically valued by their net asset value (NAV). This valuation is complex as compared to traditional investment vehicles such as debt and public equity.

• The minimum investment required to invest in private equity funds via an AIF is ₹1,00,00,000.
• There is generally a lock in period of 3 to 5 years.

• Private equity funds have a dual fee structure.
• The first component - Management fees where a fixed fee per year is charged as management fee. The fee is around 1%-2%, charged regardless of any profit generated.
• The second component - Private equity funds companies claim a certain percentage of the profit as their own known as performance fee. For example, if the performance fee is 20% and the overall profit of the investor is ₹1,00,000, Private equity funds claim and keep 20% i.e., ₹20,000. The remaining ₹80,000 is returned to the investor.

• Alternative Investments in India are typically complex investments and cannot be directly invested in.

Returns *

• Private equity funds do not guarantee returns. However, they have the potential to generate higher returns as compared to other investment options. Although they have a larger downside at the same time.

• Private equity firms take activist positions in companies to generate above average returns and then sell their stake once their goal has been achieved and reinvest those funds into other profitable projects or distribute those profits back to the investors.

• The returns are gained when the funds can exit from the invested company, which may occur through various means such as selling the company or conducting an initial public offering (IPO).

• The returns generated by hedge funds can be highly dependent on the skill of the fund manager. They vary from fund to fund. Sufficient due diligence should be done before investing in the hedge fund.

Risk Level

• Private equity funds are very high-risk investments.

• Private equity funds have a large upfront capital requirement so the amount of capital needed per investor may be very large initially and there may be capital called from time to time. It may take several years to recover this capital and make profit since target companies may require restructuring and/or streamlining. The benefits are reaped after years and there is a chance that they may not be reaped at all.

• Private equity funds are high-risk, high reward investments.

• Private equity funds are subject to liquidity risk since the up-front capital is high and the lock in periods are long.

• Manager level risk is also a risk that applies to private equity funds. Managers are the key decision makers and are instrumental in identifying good opportunities.

• It is always worth doing thorough due diligence on a particular private equity fund under consideration.

Liquidity

• Private equity funds are relatively illiquid because most private equity funds come with a lock in period.

• Early redemption comes with heavy costs to the investors.

Interesting Facts

• Private equity funds in India are invested in via Alternative Investment Funds (AIFs). They can be purchased indirectly through AIFs. There is no direct way to invest in Private equity funds in India.

• Private equity funds fall under category 1 and 2 of AIFs.

• Private Equity funds have very few disclosure requirements.

• Private equity funds are also not required to disclose their past performance records.

• Private equity funds in general do not have a perfect correlation with equity and debt investments. This is why exposure to Private equity funds results in good diversification benefits.

• Private equity funds involve taking a long position in companies that are at different stages of their life. Venture capital funds, angel funds, etc. are types of private equity funds that are in different stages of their life cycle. Typically, these funds do not have easy access to funding, which is why private equity funds provide them with capital.

Tax Implications

• Private equity funds under category 1 and 2 in AIFs are taxed at the individual level, which means taxes on any profits made are to be paid by the investors.

• Taxes are paid according to the type of gain made by the investor. These gains include short term and long-term capital gains and any other income apart from business income. Tax rates vary for different types of profits made.

• If the income or profits are in the name of a company, the income is considered as business income, and it is taxed as per the business tax slab of the company. This depends on the type of company (LLC, partnership, etc.).

Where To Invest

• Support Us - Vivriti Asset Management (vivritiamc.com)

• Invest In Alternate Investment Fund (AIF) With Motilal Oswal Mutual Fund (motilaloswalmf.com)