The high-risk, high-reward conundrum: Why private market is both attractive and enigmatic
InCred Wealth April 05, 2024
“The Indian private equity market size is projected to exhibit a growth rate (CAGR) of 25.2% during 2024-2032. (Source: imarc Group)”
But what exactly is the Private Market, and why is it attracting such significant interest?
In essence, it encompasses a diverse range of investment avenues excluding publicly listed companies. This includes venture capital, Private equity, hedge funds, and real estate investment trusts (REITs), each catering to distinct risk-return profiles and investment objectives.
This blog post will delve into the intricacies of these markets, exploring the lucrative opportunities they present, as well as the inherent risks investors need to be aware of.
Table of contents :
1. Evaluating risk and benefits in Private investments.
2. Comparing and contrasting Private Market with Public Market for
investment purposes.
3. Exploring investment avenues in the Private Market.
4. Building a long-term perspective for navigating the Private Market
landscape.
1. Evaluating risk and benefits in Private Investments
India, a burgeoning economic powerhouse, offers a dynamic and potentially lucrative landscape for Private Market investments. However, navigating this space requires a nuanced understanding of both the rewards and the accompanying risks.
Key Benefits :
● Exponential Growth Potential: The Indian Private financial Market is poised for
significant expansion, driven by a favorable ecosystem and innovation, offering
potential for substantial returns.
● Diversification: Private Market investments can significantly diversify a portfolio,
reducing overall risk and potentially enhancing long-term performance.
● Direct Impact: Investing in Private companies allows you to play a more active
role in shaping their trajectory, potentially even fostering positive social and
economic outcomes.
● Unique Opportunities: India's Private Market provides access to exclusive,
high-potential deals inaccessible on Public exchanges.
Calculated Risks :
● Illiquidity: Private Market investments often have extended lock-up periods,
making them less liquid than publicly traded assets.
● Valuation Challenges: Determining fair valuations for Private companies can be
complex, particularly in emerging markets like India.
● Valuation Challenges: Determining fair valuations for Private companies can be
complex, particularly in emerging markets like India.
● Due Diligence: Thorough due diligence is essential to mitigate risks, but can be
more resource-intensive for Private companies due to less publicly available
information.
Effectively navigating Indian Private investments requires a strategic approach, leveraging insights and industry expertise to minimize risks and maximize returns.
2. Comparing and contrasting Private Market with Public Market
The Public Market is like a big superMarket for investments – lots of choices, easy to get in. On the other hand, Private Market is more like exclusive clubs, where only a few get invited, but they offer some unique investment chances you won't find in the public places.
Here’s a brief comparison between both of these Market :
● Accessibility: Public Market is open to everyone, while Private Market is
exclusive, typically requiring high minimum investments and accreditation from
financial regulators.
● Liquidity: Public Market offers high liquidity, allowing investors to buy and sell
shares easily. Conversely, Private Market is illiquid, meaning investments are
locked in for extended periods, sometimes years.
● Risk and Return: Public Market offers lower risk due to greater transparency
and regulations, but also potentially lower returns. Private Markets, with their
higher risk due to less transparency and illiquidity, may offer the potential for
higher returns, known as the "illiquidity premium."
● Investor involvement: Public Market investors typically take a more passive
approach, while Private Market investors may have more direct involvement with
the companies they invest in, offering strategic guidance and support.
● Investment focus: Public Market caters to established companies seeking
capital to maintain operations or expand. Private Market often focuses on
earlier-stage companies with high growth potential, attracting investors seeking
high-risk, high-reward opportunities.
By comparing both the Market, investors can develop a long-term investment strategy that leverages the strengths of both Public and Private Market, catering to different investment horizons and risk appetites.
3. Exploring investment avenues in the Private Market
“Over the last decade, Indian Private Markets have out-performed their Public Market equivalents by 13.5% (as of March 2023 ). (Source: MoneyControl- CRISIL Report)”
This highlights the untapped potential within the Indian private market, offering exciting opportunities for investors. Imagine contributing to a vibrant economic future while achieving substantial returns through investments in unlisted shares.
The Indian private market offers a diverse range of investment opportunities for those looking to diversify their portfolio.
Let’s explore a few investment avenues in Indian private market :
● Unlisted Shares :
Unlisted shares represent ownership in companies that are not listed on public
stock exchanges.
These shares can offer higher growth potential compared to listed counterparts,
as they often belong to emerging or niche sectors. For instance, investing in a
promising tech startup's unlisted shares could yield substantial returns once the
company goes public or gets acquired. However, it's crucial to conduct thorough
due diligence and understand the risks, as unlisted shares can be less liquid and
more volatile.
Unlisted shares can be a lucrative addition to your investment portfolio if chosen
wisely.
● Private Equity Funds :
Private equity funds offer a way to invest in private companies with professional
management.
These funds pool money from investors to buy stakes in private companies, often
with the goal of improving their performance and selling them at a profit. Private
equity investments can provide access to high-growth companies and sectors,
such as healthcare or technology
For example, a private equity fund might invest in a healthcare startup
developing innovative medical devices, aiming to scale the business and sell it at
a higher valuation.
While these investments can offer high returns, they also come with higher risk
and require a longer-term commitment. Private equity funds can be a powerful
tool for wealth creation, provided you understand the risks and have a long-term
perspective.
● Angel Funds :
Angel funds allow individuals to invest in startups at an early stage, potentially
reaping high rewards.
These funds are made up of angel investors who provide capital to startups in
exchange for equity. Investing in startups through angel funds can offer the
chance to be part of a company's growth journey from the ground up.
For example, an investment in a tech startup developing a revolutionary app
could result in significant returns if the app becomes successful.
However, this investment avenue is also high-risk, as many startups fail to
achieve their goals. Angel funds can offer exciting opportunities but require a
high tolerance for risk and an understanding of the startup ecosystem.
In conclusion, the Indian private market provides a variety of investment opportunities,
each with its own risk-reward profile. By exploring these avenues, investors can
potentially unlock significant returns while contributing to the growth of innovative
companies.
4. Building a long-term perspective for navigating the Private Market landscape
“A staggering USD 17.13 billion was invested across 339 deals, propelling India into the ranks of the top seven PE investment destinations globally. (Source: KPMG) “
Analyzing the current scenario, it is evident that Private equity holds a strong attraction for investors. This interest is not a fleeting trend but stems from the desire for diversified portfolios and opportunities for enhanced wealth creation.
Private equity is increasingly attractive for its potential in diversified portfolios and enhanced wealth creation. However, successful navigation demands a thorough risk assessment, considering Market fluctuations, regulatory dynamics, and the nature of Private equity ventures.
Through a calculated approach, investors can tap into the untapped potential of the Private Market, forging a path toward sustainable wealth creation.
Private Market Investments demand careful consideration and a long-term perspective. Due diligence, expert guidance, and strategic partnerships with reputable fund managers are crucial for mitigating risks and capitalizing on the exciting possibilities within India's Private Market.
If you're interested in exploring investment opportunities in the Private Market, we would be delighted to assist you in building a tailored investment strategy that aligns with your risk profile and financial objectives.
Disclaimer: InCred Wealth and Investment Services Private Ltd. (InCred Wealth) is an AMFI registered Mutual Fund Distributor. InCred Wealth also acts in the capacity of distributor of various Financial Products. InCred Wealth does NOT provide investment advisory services in any manner or form. Above is not to be deemed to constitute as distribution, an offer to buy or sell or the solicitation of any offer to buy or sell any securities or financial instruments in any jurisdiction in which such distribution or offer is not authorised to any person.