A private equity fund is an alternative
investment scheme where the investors directly buy the equity shares of private
companies. These buyers comprise individuals having a high net worth, university
endowments, banks, insurance firms, custodians of pension plans, and venture
capitalists. They are known as “accredited investors’’ and have a stake in the
ownership of the private corporations in return for raising capital. They use
the investors' money to enter corporate acquisitions, fund new technologies, strengthen
the companies' cash flow, acquire equities or debt instruments. The financial
specialists managing the scheme on their behalf do not register and list the
equity shares on any stock exchange.
Kavan Choksi - How can small investors
invest in private equity funds?
Kavan Choksi is a businessman
having interests in photography, business finance, and cutting-edge technology.
According to him, many small investors might be keen to invest in lucrative
private equity fund schemes. However, they first need to fulfill the following
two stringent requirements before the financial specialists overseeing the
funds consider inviting them:
·
Own
financial assets other than residential house property worth over $ 1 million,
and
·
Earn
an annual income of over $200,000 for two previous consecutive years
before investing.
They can invest in the private equity funds
in any one of the following ways: if the investors are married, they should
provide these funds managers with proof that their annual income is more than
$3,00,000. Moreover, the share buyers should also convince the financial specialists
that they have the necessary business acumen and experience to invest.
Otherwise, experts will have to reject their applications as per the “Investor
Protection’’ guidelines set out in the region.
·
Buy
the equity shares of private start-up companies, if you personally know the
entrepreneurs,
·
Offer
to work in the private start-up companies in exchange for receiving sweat
equity shares,
·
Acquire
the stock of popular publicly trading private venture capital or buyout firms,
and
·
Purchase
an exchange-traded fund investing in publicly trading private venture capital
firms.
How do private equity funds work?
Private equity investors raise large sums
of money as capital from among themselves to form the fund. On achieving their
fundraising objective, they terminate the private equity fund scheme. They then
invest the proceeds of the fund in taking over private companies that are
either stagnant or suffering from financial difficulties. The investors of
analyzing the latest financial records of these corporations to determine
whether the organizations have good growth potential. Then, the investors provide
the private companies with the necessary capital so that they outperform other
similar corporate enterprises. In return for providing the money, private
equity investors get dividends and a controlling stake in the ownership of the
companies.
According to Kavan Choksi, participating in
private equity funds can be advantageous for small investors in building their
wealth and improving the economy. They can contribute to reviving bankrupt companies
in the private sector. However, the investors should always make it to point to
thoroughly read the offer document of the private equity scheme before
investing. They then get to know the scheme’s risk factors, dividends payable,
liquidity toleration, duration, fee structure, and asset allocation.
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