In the last few times, the global financial markets have started turning to the buzzword called private equity. It is a low cost source of capital for companies that want to accelerate their growth. Growth capital (also known as growth equity or expansion capital) is an opportunity to invest in mature companies that are undergoing a transformational event with the potential to grow dramatically. Companies that have faced challenges can use this growth capital to thrive in a variety of ways, such as expanding operations, entering new markets, profitable acquisitions and adopting cutting-edge technology.
In turn, private equity investors can earn profitable returns by investing in growth capital.
In India, many companies have adopted the private equity approach to acquire significant assets in the growth capital stage. Growth capital is a type of funding that helps companies grow and expand by providing cash, debt or equity to help them achieve their long-term goals. GA Capital Management is a financial services firm that provides growth capital to other companies.
Private Equity Participation: A Strategic Way To Capitalize On Growth YieldParticipation in equity involves either purchasing shares of a company through options or taking a partial stake in exchange for funding. If you look at the financial markets, you’ll realize that growth capital deals can provide significant amounts of funding to entrepreneurs who are looking for opportunities to return on their equity to accelerate growth. It is also a proven fact that raising growth capital from institutional and retail investors can deliver more value than selling a traditional business.
Why Private Equity / Unlisted Shares?
Private equity is an opportunity to invest in companies that are not yet listed on the stock exchange. Its funding sources are either groups of individual investors, or mutual funds that invest in or acquire privately held companies. Private equity companies are highly profitable and therefore bring in top talent.
A strategy that brings together a combination of trading and investment-portfolio management is the foundation of private equity success.
We all are aware of the benefits of investing in equity. If invested in it in the right way, it gives tremendous benefits. Many of us do not understand that there are many advantages of investing in unlisted stocks. Unlisted shares are those shares which are not yet listed on the stock exchanges. Investing in companies (unlisted stocks) even before they come out with an IPO has been one of the most attractive investment options among the various investment opportunities available in India right now.
Valuation of unlisted companies
How do you find out the value of a company whose shares are not yet listed on the stock exchanges?
The most common method is for the investors and promoters to mutually agree on a fair price. Fair value is the exercise of analyzing comparable companies, especially close competitors or companies of approximately equal age and similar growth trajectory and size. It also includes parameters such as price-to-sales, price-to-earnings and price-to-book.
What to look for before buying private equity?
Like any other investment, investors need to do due diligence about the companies they choose to invest in. It is important to understand the vision and long-term goals of the entrepreneur/management and examine the company’s revenue sources, revenue mix and cash flows.
Investors need to compare other similar companies that have the same business or product/service category. This will ensure better understanding of the market and competitive edge of the said company over similar companies. Finally, it is important to understand where the company wants to use the growth capital and what are the long-term plans of the company.
Summary
For investors who have already invested in stock exchanges, mutual funds, etc., such stocks also provide an opportunity to diversify their risk. Furthermore, since unlisted shares are much lower priced and less volatile, investors do not need to worry about their investments or monitor them on a daily basis.
Investing in unlisted shares will benefit the investor, as it will result in better ownership and better profits. This allows investors to play a more active role in taking the company forward in terms of better decision making, strategic input, access to growth capital and overall guidance.