{"id":6091,"date":"2019-08-27T18:49:50","date_gmt":"2019-08-27T13:19:50","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=6091"},"modified":"2020-04-18T15:36:07","modified_gmt":"2020-04-18T10:06:07","slug":"all-you-should-know-about-private-equity-firms-stages-valuation-exit-options","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/","title":{"rendered":"All you should know about Private Equity Firms: Stages, Valuation, Exit Options"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Private Equity is playing a crucial role in boosting the Indian Economy. According to the Indian Private Equity Report 2019 published by Bain &amp; Company, the private equity investment momentum remained robust in 2018. Hence, Private Equity Firms are performing excellently. <\/p>\n\n\n\n<p>The total investment from VC (Venture\nCapital) and PE (Private Equity) summed a total value of $26.3 billion from\napproximately 793 deals during the year. <\/p>\n\n\n\n<p>With this, India has experienced a\nsurge in PE activity in the past few years with the growth of local funds. Generally,\na private equity fund is a collective investment scheme that is used for\ninvesting in several equity securities based on one of the investment\nstrategies related to Private Equity.<\/p>\n\n\n\n<p>Typically, such funds are managed by\na firm or limited liability partnership. The maximum term of such funds is ten\nyears with an option of an annual extension. To understand the private Equity,\nits registration process, etc. stay on the page and keep reading. <\/p>\n\n\n\n<div class=\"browse\">\n<p>Browse through our articles on services provided at <a href=\"https:\/\/swaritadvisors.com\">Swarit Advisors<\/a>, and just let us know if we can help you with your IPO or Comapny Takeover or SEBI Advisory Services.<\/p>\n<div class=\"browse1\">\n<table class=\"table1\">\n\n<tbody>\n<tr>\n<td><a href=\"https:\/\/swaritadvisors.com\/mergers-and-acquisitions\"><span>Mergers and Acquisitions<\/a>&nbsp;<\/span><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/buyback-of-shares\"><span>Buyback of Shares<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/merger-and-amalgamation\"><span>Merger and Amalgamation<\/span><\/a><\/td>\n<\/tr>\n<tr>\n<td><a href=\"https:\/\/swaritadvisors.com\/public-issues\"><span>Public Issues<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/rights-issue\"><span>Rights Issue<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/preferential-allotment\"><span>Preferential Allotment<\/span><\/a><\/td>\n<\/tr>\n<tr>\n<td><a href=\"https:\/\/swaritadvisors.com\/company-takeover\"><span>Company Takeover<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/issue-of-debentures\"><span>Issue of Debentures<\/span><\/a><\/td>\n<td><a href=\"https:\/\/swaritadvisors.com\/insurance-broker-license\"><span>Insurance Broker License<\/span><\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/table>\n<\/div>\n<\/div>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a30b2976e53f\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a30b2976e53f\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#What_is_Private_Equity\" title=\"What is Private\nEquity?\">What is Private\nEquity?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#Where_does_private_equity_fund_come_from\" title=\"Where does\nprivate equity fund come from?\">Where does\nprivate equity fund come from?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#Stages_of_Private_Equity_Investment\" title=\"Stages of\nPrivate Equity Investment\">Stages of\nPrivate Equity Investment<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#Valuation_of_companies_by_Private_Equity_Firms\" title=\"Valuation of companies\nby Private Equity Firms\">Valuation of companies\nby Private Equity Firms<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#Management_of_Portfolio_Companies_by_Private_Equity_Firms\" title=\"Management of\nPortfolio Companies by Private Equity Firms \">Management of\nPortfolio Companies by Private Equity Firms <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#Exit_options_for_Private_Equity_Firms\" title=\"Exit options for\nPrivate Equity Firms\">Exit options for\nPrivate Equity Firms<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#Initial_Public_Offering_IPO\" title=\"Initial Public Offering (IPO)\">Initial Public Offering (IPO)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#Secondary_Market\" title=\"Secondary Market\">Secondary Market<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#Management_Buyout\" title=\"Management Buyout\">Management Buyout<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/swaritadvisors.com\/learning\/all-you-should-know-about-private-equity-firms-stages-valuation-exit-options\/#Liquidation\" title=\"Liquidation\">Liquidation<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_Private_Equity\"><\/span>What is Private\nEquity?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Private Equity refers to the fund or\ninvestment collected from the investors and invested in a potentially\nsuccessful organization but isn\u2019t traded publicly in the stock market. <\/p>\n\n\n\n<p>Private equity funds gather a\nhandsome return from an investment with 7-10 years of capital appreciation. Private\nEquity is similar to venture capital to a great extent.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Where_does_private_equity_fund_come_from\"><\/span>Where does\nprivate equity fund come from?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Private Equity Funds come from the\nfollowing sources:<\/p>\n\n\n\n<ul><li>Pension Funds<\/li><li>Endowments<\/li><li>Institutional Investors<\/li><li>High Net Worth Individuals<\/li><li>Investment Companies<\/li><\/ul>\n\n\n\n<p>Private equity firms let high net\nworth individuals and fund managers to modify their portfolio and lessen risk. <\/p>\n\n\n\n<p>Besides, the investors get their\ncapitals back within ten years and with a higher return. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Stages_of_Private_Equity_Investment\"><\/span>Stages of\nPrivate Equity Investment<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Generally, there are four stages of\nPrivate Equity Investment in India. They are as follows: <\/p>\n\n\n\n<ul><li><strong>Seed stage investment:<\/strong> Under the seed stage, the\ninvestment is made for the sake of a business idea. Generally, the investment\nis made for market research and development.<\/li><li><strong>Early-stage investment:<\/strong> It&#8217;s the second stage of\ninvestment. Here, the investment is made to help companies start up their\noperation activity and prior to the occurrence of commercial sales. <\/li><li><strong>Formative stage\ninvestment:<\/strong> In this stage, the investor invests their capital to initiate or scale\nup the company\u2019s operations. <\/li><li><strong>Later stage investment:<\/strong> In this stage, the\ncapital is put up for expanding the business. Furthermore, the investment is\nmade to scale up the business before it goes public.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Valuation_of_companies_by_Private_Equity_Firms\"><\/span>Valuation of companies\nby Private Equity Firms<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>We all know that the <a rel=\"noreferrer noopener\" aria-label=\"public company (opens in a new tab)\" href=\"https:\/\/swaritadvisors.com\/public-limited-company-registration\" target=\"_blank\"><strong><em>public company<\/em><\/strong><\/a> can trade its shares on the stock market. Hence, they are easily valued. However, the same isn&#8217;t true for private companies. The shares of these companies can&#8217;t be traded, and therefore, PE firms use several methods and techniques for ascertaining the actual value of shares.<\/p>\n\n\n\n<p>Here are some of the valuation\nmethods for Private Equity Funds:<\/p>\n\n\n\n<ul><li><strong>Discounted Cash Flow\nMethod: <\/strong>It\u2019s\na valuation technique where the value of the company is valued by discounting\nestimated future cash flows of the company at a discounted rate. Moreover, high\nrisk intends to convert to a higher discount rate, which implies the company&#8217;s\nlower valuation.<\/li><li><strong>Relative value method: <\/strong>It&#8217;s a method where\nearnings multiples of similar companies apply to the target company&#8217;s earnings.\nGenerally, the earning multiples equal the average of the earnings and value of\ncomparable companies, traded in stock markets.<\/li><li><strong>Replacement cost method: <\/strong>In such a method, the\nvalue of a business is estimated through the calculation of the estimated cost\nto recreate the business as per the value stands on the valuation date.\nUsually, such techniques are used to estimate the value of companies working in\nthe seed or early stage. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Management_of_Portfolio_Companies_by_Private_Equity_Firms\"><\/span>Management of\nPortfolio Companies by Private Equity Firms <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Here are some of the following\naspects of the private equity investment that aids private equity firm to\nmanage and operate their investment companies:<\/p>\n\n\n\n<ul><li><strong>Corporate Board Seats:<\/strong> To protect the interest of a PE firm, a person is nominated from the Private Equity Firms on the Board of Directors of the company. It follows in case of corporate events such as a business takeover, sale of shares, IPO, restructuring, liquidation, or bankruptcy. <\/li><li><strong>Non-Compete Clause:<\/strong> Such a clause is levied on the founders. Besides, it prevents them from starting the same activity again during a pre-defined timeframe.<\/li><li><strong>Liquidation preference and preferred dividends:<\/strong> Generally, during the distribution, Private Equity Firms are considered first. Moreover, these are guaranteed a minimum return on their original investment prior to receipt of returns by the shareholders. <\/li><li><strong>Reserved matters:<\/strong> Some strategic decisions like acquisitions or divestitures, and changes in the <a rel=\"noreferrer noopener\" aria-label=\"business plan (opens in a new tab)\" href=\"https:\/\/swaritadvisors.com\/business-plan\" target=\"_blank\"><strong><em>business plan<\/em><\/strong><\/a> are subject to veto or approval by the PE firm.\u00a0 <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Exit_options_for_Private_Equity_Firms\"><\/span>Exit options for\nPrivate Equity Firms<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Most of the Private Equity Firms\nconsider exit options before making any investment. The reason for the same\ncould be that exit options help in unlocking value in private equity\ninvestment.<\/p>\n\n\n\n<p>Below we have described some of the\nexit options for PE investors: <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Initial_Public_Offering_IPO\"><\/span><strong>Initial Public Offering (IPO)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>IPO is one of the most preferred exit options among the PE firms. It is because IPO offers higher valuation multiples and improves liquidity. Furthermore, it lets the business raise more funds so that it can grow even more. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Secondary_Market\"><\/span><strong>Secondary Market<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The secondary market is held by PE firms where the shares are sold to a financial investor or strategic investors. Secondary Market Exit Options are one of the most common forms of exit.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Management_Buyout\"><\/span><strong>Management Buyout<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><div id=\"bain\"><p>Under such exit options, the management group purchases the shares held by the PE firms through debt raising or other kinds of funds.<\/p><\/div><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Liquidation\"><\/span><strong>Liquidation<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Such options are one of the worst cases wherein the firms have to liquidate their shareholding at ground prices in case the company isn\u2019t workable anymore. <\/p>\n\n\n\n<div class=\"read\"><p><b>Also, Read:<\/b> <mark><a href=\"https:\/\/swaritadvisors.com\/learning\/how-to-become-an-investment-adviser-in-india\/\" target=\"_blank\" rel=\"noopener noreferrer\">How to Become an Investment Adviser in India<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Private Equity is playing a crucial role in boosting the Indian Economy. According to the Indian Private Equity Report 2019 published by Bain &amp; Company, the private equity investment momentum remained robust in 2018. Hence, Private Equity Firms are performing excellently. The total investment from VC (Venture Capital) and PE (Private Equity) summed a total [&hellip;]<\/p>\n","protected":false},"author":6,"featured_media":6094,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[546],"tags":[550,547],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6091"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=6091"}],"version-history":[{"count":15,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6091\/revisions"}],"predecessor-version":[{"id":10114,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/6091\/revisions\/10114"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/6094"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=6091"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=6091"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=6091"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}