Private Equity Explained Understanding PE With Examples

  1. Stock Markets Basic
    1. Invest:3 benefits of investing for your future
    2. Types of Investment Diversification asset classes
    3. What is the share market? What Does It Do and How Does It Work with examples
    4. SEBI What is Securities and Exchange Board of India
    5. Stock Broker Financial Intermediaries or Market Intermediaries role in share market
    6. Depository and types of Depository Participants in India
    7. ICCL, NSE Clearing Limited and Bank’s role as Financial intermediary
    8. Angel Investors What are their roles with examples
    9. Venture Capitalist Who Are They and What Do They Do
    10. CAPEX Understanding Capital Expenditure with examples
    11. Private Equity Explained Understanding PE With Examples
    12. Initial Public Offering (IPO): What It Is and How It Works
    13. Launch IPO Why Do Companies Go Public
    14. IPO process how Initial Public Offering works in India
    15. What is IPO Key Terms Related to Initial Public Offering
    16. What is the share market?
    17. Share price understanding how does prices increase or decrease with examples
    18. Share trading: How Does It Work? with examples
    19. Types of traders in share market
    20. Market Index How Indexing Works, Types, and Examples in share market
    21. Share market indices importance and key terms
    22. Index construction methodology
    23. Share market terminology
    24. Share market terminology for beginners
    25. How to Trade Shares for Beginners
    26. Clearing and settlement process in the Indian Share market
    27. Stock selling learn What happens when you sell a stock
    28. Corporate actions in share market and impact on prices
    29. Bonus Issue of Shares Explained and How They Work
    30. Stock Split and Buyback of Shares What you need to know
    31. Monetary Policy by RBI Repo Rate, reverse repo rate, Cash reserve
    32. Inflation and IIP explained with examples
    33. Purchasing Managers Index, Budget, Corporate Earnings Announcement and Non-Financial events
    34. Stock market basics for beginners
    35. Offer for Sale and Follow-on Public Offer explained with examples
    36. Rights Issue and its relevance to shareholders explained with examples
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Part 4- Private Equity 

As years went by, the company’s success kept expanding. This 8-year-old organisation had become highly ambitious and so determined to raise the bar that they wanted to spread their wings across the nation. It further broadened its range of achievements by manufacturing as well as retailing fashion jewellery, designer cosmetics and fragrances.

The CAPEX requirement for reaching the new ambition is set at 80 Crs. However, the company does not wish to increase their debt due to the interest rate burden, otherwise known as finance charges, taking a toll on their profits. For example, with Rs.120 in profit and Rs. 30 paid towards finance charges, this results in the profitability of Rs. 90. This topic will be delved into more in the Fundamental Analysis module.

The company made the decision to acquire Series C funding. Instead of a typical VC, which generally offers relatively small sums that tend to run in a range of a few crores, they opted for a Private Equity (PE) investor. Imagine the PE as being like the big brother of a VC. There are several distinctions between these two types of investors:

– VCs usually invest a lesser amount compared to what PE partners typically put in.

– VCs take on considerably more risk than PEs and invest in companies that are at an early stage. Whereas PEs tend to direct their resources towards established businesses, where the risk is much lower.

– Once in, PEs take a board seat and keep an eye on how the company is faring.

PE investors are highly qualified and possess strong professional backgrounds. They bring large sums of money to the table, enabling constructive use of capital, and often appoint a representative to the board of the investee company to ensure that the desired outcomes are achieved.

Typically, a PE will invest in funding major CAPEX costs. They’re usually uninterested in providing support during the initial phase and favour companies with an established revenue and operating record. The use of capital for CAPEX takes time to complete.

Let us assume that the firm obtains money from a Private Equity group and increases its operations. 

The next step can be an IPO, which will be discussed in the next chapter.