PE exposure not for small-ticket HNIs

Don’t enter the space with Rs 10-50 lakh due to less liquidity, higher fees.

Bharat Banka, managing director & CEO, Aditya Birla Private Equity, is delighted with high net-worth individuals’ (HNIs’) rising interest in private equity (PE). With expected returns of 25-30 per cent annually, it is a tempting route for investment.

Delhi-resident and investment banker Chetan Gulati, who has Rs 50 lakh to park, has been getting regular calls from a leading financial services firm’s PE arm. “They want me to invest in their recently launched fund, which will deliver up to 30 per cent,” says 31-year-old Gulati.

According to industry players, three-four funds have recently collected money from Indian HNIs, with an average ticket size of anywhere between Rs 50 lakh to Rs 1 crore.

While the returns are impressive, Sanjeev Aggarwal, co-founder, Helion Venture Partners, advises Gulati strictly against the segment. “Someone with at least Rs 100 crore should enter this space, as quality funds accept a minimum of Rs 1 crore as investment.”

With the risks associated, you may not get your money back. Only if you have Rs 100 crore, can you afford to invest Rs 1 crore. PE experts consider those with less than Rs 1-crore investible money as retail investors.

Generally, PE investors put their money in companies that are not publicly traded or invested as part of buyouts, hedge funds or new ventures. These companies endeavour to add value to organisations with the objective of making these profitable. They deal in real estate, nano technology, renewable energy and biotech, among others. Typically, they accept investments of Rs 1 crore and above.

Investing in PE wasn’t a popular concept five years before, but the trend has recently caught on.

The main advantage of investing in PE funds is the high returns, as against equity funds. In comparison, the Sensex and Nifty have returned a little over seven per cent in the last one year.
 

BALANCING ACT
PE FUNDS For HNIs; minimum investment = Rs 50 lakh - 1 crore  Returns = 25-30 per cent Management fee = 2 per cent (yearly); upfront load = over 2 per cent & performance-linked fee = 20 per cent (pre-tax returns)  Risky as investments in sunrise sectors, hedge funds and start-ups Difficult to pre-empt performance as no track record Illiquid; need a horizon of five-seven years for good returns	EQUITY FUNDS For retail and HNIs; SIP investment = Rs 100 onwards Returns = 13-15 per cent Annual expense ratio = 2.50 per cent (equity diversified fund) Less risky as investments across sectors and market caps Long-term performance record available Liquid; need a horizon of two-three years for good returns

But should one enter the space in the current market condition? Banka says, “PE is not a place to be in a euphoric market. You can take advantage of opportunistic situations with PE funds in a volatile market.” Obviously, it comes with its own set of risks. Therefore, you should not look at over 10 per cent of your portfolio.

Compared to equity funds, the cost is also higher. Typically, these charge an yearly management fee of two per cent, one-time upfront load of slightly over two per cent and a performance fee of 20 per cent of pre-tax returns with a catch-up. An equity diversified fund levies a fund management fee of 2.5 per cent annually.

“Many investors don’t understand these products and there are limited options for investing less than Rs 1 crore in India. Most real estate funds accept small investments (sometimes Rs 10 lakh). But we do not recommend these funds,” says Rakesh Sony, director, Motilal Oswal PE Advisor.

Since PE requires an investment horizon of at least five-seven years, experts say the returns are easily two-three per cent more than equities. Besides, these funds could be a good portfolio diversifier. “Unlike an equity fund, where you can exit mid-way depending on the day’s net asset, you have to stick around for a much longer period to get the best out of a PE fund,” adds Sony.