Private equity investment is a good investment option in the hands of an investor who understands the nuances such as illiquidity and the failure rate that come along with such investments. Investing in the private equity can be done either directly or through funds. First-time investors are advised to take the alternative investment fund (AIF) route. AIFs are a class of pooled-in vehicles for investing in real estate, private equity and hedge funds. Typically, AIFs are neither listed nor traded in most cases. So, the liquidity is less. It means that that the money invested is for the life of the fund or till the fund exits its investments. First-time investors should go through AIFs as these investments are managed by professionals and help in diversifying their holding across multiple investments.
The direct route
Several venture capital funds, angel platforms and aggregators allow companies in which they have invested to pitch for capital directly from investors. Investors can participate directly and buy shares of such companies as private investments. These are private and one-on-one transactions, and may not have limitations on minimum amount and tenure. However, the investments are riskier.
ALSO READ: Switching between mutual fund schemes? Know its tax implications
Portfolio Management services route
For investors who do not want to invest a lot of money can take the portfolio management services route to invest in private equities. A minimum upfront investment of Rs 2.5 million in PMS is required. Wealth managers and asset managers run SEBI-approved PMS portfolios that invest in private equity. An investor can open an account with a PMS manager handling such private equity investments and invest money towards sectors that appeal them.
The returns in most private equity funds range between 22 and 24 per cent annually. It is higher than absolute returns in other asset classes. However, the investors should be well equipped with a sizeable investible surplus, high-risk appetite, ability to hold the investments for an extended period of time and understanding financial concepts. The private equity investments should not be more than 5-10 per cent of your portfolio. It is high on the risk-return payoffs, but investments should be made under professional guidance. Since the investments are mostly at an early stage, it becomes uncertain how the company will fare in the future. Also, unlike the highly regulated listed stocks, there can be pitfalls in the financial statements of a private company which requires a professional eye to ascertain.
ALSO READ: Mutual Fund Investment: 6 criteria of picking the right mutual fund
These assets do not provide instant liquidity, unlike listed stocks where you can liquidate your assets anytime you want. Private equity funds do not offer redemption and it comes with no specific lock-in-period. Investors get their money back, either when the company gets listed or can sell their stake to another investor or when the fund exits the company. Generally, it carries a tenure of 6-10 years.
ALSO READ: For diversification adopt a contrarian fund strategy in a mutual fund investment
Taxation in the private equity investments is not different from investments routes. For listed stocks, a period of holding greater than 12 months qualifies as long-term capital gains or else it is considered as short-term capital gains. In case of unlisted stocks, the period is two years. Listed shares are taxed at 15 per cent for STCG and 10 per cent for LTCG. Unlisted stocks get taxed at 20 per cent LTCG with indexation and as per the income tax slab rate for investments lesser than 24 months.