Why Private Equity Leads the Preferences of HNI Investors in India

6 Jan 2025 , 03:38 PM

Higher returns, portfolio diversification, and access to exclusive deals are probably why HNIs invest in PE. By investing in private equity in India, they could tap into a somewhat different asset class with impressive growth potential.

This blog explains why PE is acquiring preference as an investment approach for discerning HNIs in India.

What is Private Equity?

PE is an investment in which individuals pool their money to buy shares of independent companies. As these organisations are not traded publicly, their shares cannot be traded in the open market. Private equity in India financers generally hold onto these investments for several years, hoping they can sell the shares for a reasonable price.

Why PE is a Good Option for HNI Investors?

There are several strong benefits of investing in private equity. This investment, for example, provides higher returns than traditional ones such as stocks and bonds. It allows HNIs to capitalise on illiquidity, forcing them not to sell when the situation gets very bad in the marketplace, thus ensuring more significant long-term gains.

Another significant advantage of private equity investment is diversification. Since private equity investments have a very low correlation with public markets, they can diversify an HNI’s overall portfolio and reduce risk. HNI investment in private equity further provides access to exclusive deals unavailable to the public due to private equity firms’ resources and expertise in identifying promising investment opportunities.

Another attractive factor is the benefit of increased control in private equity investing. Investors can sometimes have board representation, directly impacting the company’s strategy. In certain circumstances, tax benefits accompany investment by HNIs in private equity.

How to Invest in PE

Private equity in HNI investment is possible through two primary avenues: investing in PE funds or direct investments in private companies. PE funds are professionally managed investment vehicles in which capital pools from several investors acquire stakes in myriad private businesses.

Expert managers usually manage these funds. Due diligence on a stake’s potentiality precedes the acquisition process and active portfolio management. Investing in a PE fund gives an HNI diversification over multiple companies and professional portfolio management, making it appropriate for most HNIs.

Risks of Investing in PE

There are several pitfalls associated with private equity in HNI investments. These include:

Risks	In brief
Illiquidity	PE investments are not easily bought or sold. This means that investors may be unable to access their money when needed.
Lack of transparency	Privately held companies are not required to disclose information as much as publicly traded organisations. This may mean that investors cannot access all the data they need to make informed investment decisions.
Value risks	Privately held businesses are hard to value, so individuals may end up paying more than the returns
Fund Manager Risk	The success of a PE investment heavily relies on fund managers. Hence, an investor should do sufficient due diligence before investing.

Future Scenario of Private Equity in India

The prospects of private equity in India seem bright. The Indian economy is growing phenomenally, and the available pool of potential investment is considerable. The government, too, has been supportive of this PE industry.

Conclusion

Private equity has topped the list of favourite HNI Investment Options in India. PE provides significant benefits over investing in the mainstream market. With better returns and access to deals, it still needs prudent knowledge about its risks in the private equity game. Therefore, it is necessary to consult experts.