EXIT STRATEGIES OF PRIVATE EQUITY – Dr. G.Y. Vishwanath

17th February 2025

The investment in private companies, which are not publicly traded, is called private equity. Public equity investment is  well known and relatively simple in the  sense that the path to investment and exit is known to everyone and simple. When you invest in a public limited company your shares are already listed  or going to be listed after the IPO process. After listing you can sell your shares and exit your investment in an easy way. In private equity investment, the exit is not  simple as the  shares are not listed on the stock exchange. If you  hold the shares it’s not  easy to sell  or transfer the shares to others  easily.

Now let us see in detail the structure and functioning of private equity. For  an  established company  it   has the  option  of going for an  IPO or FPO for  fundraising. But for a small company or a startup they cannot immediately access capital  markets as they wouldn’t be having the resources for the same. Hence instead of tapping the traditional capital markets they might try for alternate sources of funding. Here comes the use of Private equity, which is relatively easy and simple to access. This can be done by connecting to Venture capital funds or high net worth individuals and pitching them with your project proposal to invest in your company. Even here, the process is complex and cumbersome. Here comes the need for the facilitators who would help you with the deal and connect you to the potential investors. In India we have few firms which are very active in this are HDFC bank, ICICI Bank and Kotak Bank. Through their subsidiaries, they market these Private equities to clients who are willing to take the risk of investing in Private equity.

How private equity is managed

In the Indian context, we have many companies which are subsidiaries of banks who are into the management of private equity like icici securities and kotak securities. The company, which manages this private equity fund, is called a General Partner. They establish the fund, typically invest at least 2% and solicit funds from investors. The investors are usually high networth individuals and the minimum investment in private equity is around 20 lakhs. The general partner charges a management fee and also a percentage share of 20% if the returns are above a threshold level. Nowadays the amount of funds collected by private equity funds are increasing exponentially due to the projected or perceived high returns and the aggressive marketing.

Why are private equity funds becoming popular?

The returns from Private equity funds are usually above that of regular mutual funds. This happens because of the diversification options, Pre IPO investment opportunities and long term capital gains advantage. PE investments are generally held for a longer period and get qualified for long term capital gain tax which is a huge incentive for investors.

Exit strategies

1. IPO route : When the company decides to go for IPO issues, the PE fund can sell their holdings through IPO route. This would enable the fund to make huge profits as the profit making companies IPOs usually command huge premiums in the new issue market.
2. Strategic Acquisition : if a strategic acquirer decides to buy the company, then the PE fund might get an opportunity to sell their holdings at an attractive price.
3. Merger with another company : if the invested company gets merged with another company, there is a possibility of exit for the fund.
4. Liquidation : If the company is liquidated due to surmounted losses the PE fund may get some amount of money back and usually has to bear a huge amount of loss.
5. Write off : Sometimes, when the company is not performing well and the company is in huge debt and when there is no chance of revival, this investment may be written off.

As can be seen above, there are few opportunities for windfall profits and also chances of losing entire investments. Generally, PE funds manage to make profits because of diversification as they diversify their investments in many companies. Even if a few investments go bust the other investments will compensate with huge returns which would cover these losses. That’s why Private Equity remains so attractive to investors.

Few successful PE investments :

1. Warburg Pincus’ Investment in Bharti Televentures (2001)
   Warburg Pincus invested $292 million in Bharti Televentures, which later became Bharti Airtel. The investment generated a 10x return.
2. Carlyle Group’s Investment in India Infoline (2006)
   Carlyle Group invested $100 million in India Infoline, which was later listed on the Indian stock exchanges, generating a 5x return.
3. Apax Partners’ Investment in iGate (2003)
   Apax Partners invested $20 million in iGate, which was later sold to Capgemini for $4.04 billion, generating a 20x return.
4. TPG’s Investment in Shriram Transport Finance (2006)
   TPG invested $100 million in Shriram Transport Finance, which was later listed on the Indian stock exchanges, generating a 5x return.

Discussion questions

1. How do private equity firms contribute to innovation and entrepreneurship?
2. Discuss the ethical considerations surrounding private equity investments, including concerns about confidentiality, conflicts of interest, and fairness.