Of late, global financial markets have been trending towards a buzzword called Private Equity. This is a cost-effective source of capital for companies which are looking to further their growth trajectory. Growth capital (also known as growth equity or expansion capital) is a type of investment opportunity in mature companies that are undergoing a life-cycle transformation event with dramatic growth potential. Companies which have withstood headwinds can use this growth capital to flourish through various ways such as the expansion of operations, penetration of new markets, making profitable acquisitions and utilizing cutting edge technology etc.
In turn, private equity investors can gain a profitable return by investing in growth capital.
In India, many companies have adopted private equity style structures to secure significant assets at the growth capital stage. Growth capital is a type of financing that helps companies grow and expand, providing cash, loans, or equity to help them achieve their long-term goals.
Equity participation: A Strategic way to reap Growth Yields
Equity participation involves the purchase of a company’s shares either through options or by allowing partial ownership in exchange for financing.
If you look through the financial markets, you will realize that GROWTH CAPITAL deals can provide considerable amounts of funding to entrepreneurs who are looking for a return on their shares to generate cash for accelerating growth.
It is also a proven fact that the injection of GROWTH CAPITAL, from institutional and retail investors, can provide more value than a traditional trade sale.
Why Private Equity/ Unlisted Shares?
Private equity is an investment opportunity in companies that are not yet listed on a stock exchange. Its funding sources are either pools of individual investors or mutual funds that invest in or acquire privately held companies. Private equity businesses are highly profitable and therefore bring in top talent.
That strategy, which encapsulates a combination of business and investment-portfolio management, is at the core of private equity’s success.
We are all aware of the benefits of investing in equity – it provides an unprecedented upside if done right. Many of us do not realize that investing in unlisted shares has multiple advantages. Unlisted shares are shares that are not yet listed on stock exchanges. Investment in Pre-IPO companies (unlisted shares) at present has been an attractive investment option out of the various investment opportunities in India.
Valuing Unlisted Companies
How can you ascertain the value of a company whose shares are not listed on the stock exchanges?
The most common method is investors and promoters agreeing on a fair value. This fair value is a function of analyzing comparable companies, preferably close competitors or companies with similar age, growth trajectory and size. The fair value also includes metrics such as price-to-sales, price-to-earnings and price-to-book.
What to look for before buying unlisted shares?
Like any investment, investors need to do proper due diligence of companies they are interested in investing in. It is important to understand the entrepreneur/ the management’s vision and long-term goals and checking the company’s revenue sources, revenue mix and cash flow.
The investors need to compare other similar companies who have a similar line of business or a product/ service range. This will ensure a better understanding of the market and also the competitive edge that the company holds over its peers. Finally, it is important to understand where the company intends to use the GROWTH CAPITAL and what are the company’s long-term plans.
For investors who have already invested in stock exchanges, in mutual funds etc., such shares also provide a route for risk diversification. Also, as the price of unlisted shares is fairly small and less volatile, the investors do not have to worry about their investments or keep track of it on a daily basis.
Investing in unlisted shares will benefit the investor as it will result in better ownership holdings and thereby better profits. It also allows investors to play a more involved role in terms of guiding the company in terms of better decision making, strategic input, access to growth capital and overall guidance.