Private Equities – Gunning for a larger pie in U/HNI Investment Portfolios

By InCred April 26, 2022

A decade back, the world was at the cusp of innovation and entrepreneurs across the world took inspiration from the two Stanford students who rented a garage in Menlo Park, California to start a new search engine. This search engine, which you all know as Google, eventually revolutionized how people searched the internet. It is now valued at approximately $1 trillion. This was then.

Google was initially funded in August 1998 by an investment of $100,000 from Andy Bechtolsheim, co-founder of Sun Microsystems, a few weeks prior to the day Google was officially incorporated. Google received money from three other angel investors: Amazon.com founder Jeff Bezos, Stanford University computer science professor David Cheriton, and entrepreneur Ram Shriram. Between these initial investors, friends, and family Google raised around $1,000,000, which is what allowed them to open-up their original shop in Menlo Park, California .

Today, you can easily invest in the Google stock on the NYSE. However, when you buy it today, you are getting in when Google has firmly established itself as a tech behemoth. To be able to invest early in a company, from the time it raises seed funding to the various rounds (series) of funding, is what private market investing is all about. Private market investing is what gives Institutional investors and sophisticated investors the kind of runway and edge that can’t be compared with investing in listed equities.

As per a recent BCG report, driven by high valuations of global equity markets, low interest rates environment, low bond yields, the global individual investors private markets AuM is expected to thrive. The report states that by 2025, the global private equity market is expected to more than double in size.

What is Private market investing? And is it for you?

While investing in Listed Equities is familiar territory for most investors and it is the primary asset class for deriving long term growth, Unlisted Equities forms a part of the Alternative Investments asset class.

The returns expectation from unlisted equities can be as high as 3x or 5x of listed equities but with as much greater associated risks as well. Think abnormal gains or abnormal losses; not an asset class to be dabbled in by retail investors or those with personal liabilities like home loans etc. It is important that the parties investing have the surplus scale (e.g.UHNI/HNI, accredited investors) and the knowledge to understand the underlying business.

Unlisted equity investing simply put is about providing capital to private companies that have an established business model and have demonstrated ability to generate shareholder value. The track-record of the promoter, the nature and the prospects of the business and the quality of other private investors are some of the very basic evaluation criteria when considering a private equity investment.

Key areas that are drawing in U/HNI investor interest include:

Potential to unlock significant value: Inevitably, unlisted companies allow you an opportunity to invest at a significant discount to potential long-term value. Since access is elusive, and thus liquidity is also limited, such investments attract a limited number of people who are willing to stay invested for a longer period. The limited liquidity and lower number of participants translates to better valuations. Further, these stocks are likely to go public at some point in the future and thus, can provide significant upside potential. As an investor, you are likely to benefit when a value unlocking event, such as an Initial Public Offering (IPO) takes place.

Diversification of risk: Inarguably, unlisted equities carry a higher level of risk. However, this can be both a boon and a bane. Due to the differentiated risk profile compared to listed equities, they can act as portfolio diversifiers and can enhance the risk-adjusted returns of your investment portfolio.

Lower volatility: Due to the illiquid nature of unlisted equities, they tend to exhibit lower volatility compared to listed shares. While this means that prices are seldom impacted by short-term investor sentiment and demand-supply dynamics, it does not mean that there is no downside risk. On the contrary, the quantum of downside can be high in case of an error in judgement. Having said that, the relative stability of prices can reduce intermittent financial stress.

By investing in unlisted equity, the investor also rules out the uncertainty around allotment of shares of company that may see high IPO demand / over subscription.

Getting in at the bottom rung of the growth ladder

In the past, it was only the large institutions and funds that were able to access opportunities in the private/unlisted space and invest in such companies. However, with the democratisation of financial services, partly precipitated by technology, individual High-Net-Worth Individuals today can easily access unlisted equity and other private market opportunities. Usually, these shares are bought in an off-market transaction between the buyer and the seller and are kept in your demat account.

Shares of unlisted companies can be bought through intermediaries and investment platforms that specialise in the sourcing and placement of unlisted shares but given the illiquid nature of unlisted equities and the prevailing information asymmetries, it is always best to deal with reputed and trustworthy intermediaries.

Understand the risks

That said, investing in private markets is something that you must not approach with blinkers on. By its sheer nature and associated risks private equity investing must be done with complete due diligence and knowledge of the pitfalls. It is important that the parties investing have the scale and the knowledge to understand the underlying business.

Thus, when you are evaluating investments in this space you must continue to assess them with much more rigour than you would a listed company and ensure that it is well-aligned with your overall asset allocation strategy.

Disclaimer: The information and opinions are not and should not be construed as an offer or solicitation to buy or sell -any securities or make any investments. The financial instrument discussed, and opinions expressed in this presentation/note may not be suitable for all investors, who must make their own investment decisions, based on their own investment objective, financial positions, and respective needs. The reader is solely responsible for consulting his/her/its own independent advisors as to the legal, tax, accounting and related matters concerning investments and nothing in this article or in any communication shall constitute such legal, tax or accounting advice. InCred Wealth Private Ltd. is an AMFI registered Mutual Fund Distributor. InCred Wealth Pvt Ltd also acts in the capacity of distributor of various Financial Products. Some products are offered through partners and group companies of InCred. Investments are subject to market risks, read all the scheme related documents carefully before investing. InCred Wealth does NOT provide investment advisory services in any manner or form.

Share