Private Equity Above And Beyond Part (1)

What's up? Precize family! I trust you're all in good health and are dedicated to expanding your knowledge daily. You've come to the right place if you're seeking mental nourishment today. We're diving deep into the universe of unlisted shares and their intricacies.

Unlisted Shares are a fund that aims to provide working capital to target companies for, oops! I was about to step on the wrong bandwagon, as everyone else does in this space.

Unlisted Shares are often misunderstood as a fund, but let's clear that up immediately – Unlisted Shares are NOT A FUND.

While Unlisted Shares might resemble a fund in some aspects, primarily due to their association with high-net-worth individuals and institutional investors, they are fundamentally distinct from funds.

• So, what exactly are Unlisted Shares?

Unlisted Shares are an alternative asset class that refers to the equity securities of companies not traded on public exchanges like NSE or BSE. And if I were to serve it in a teaspoon, Unlisted Shares are nothing but equity securities of private limited companies. 

• But what makes Unlisted Shares unique?

Unlisted Shares are a type of pooled investment vehicle wherein several investors with thick pockets contribute to form a pool of funds used to invest in privately held companies' equity securities or debt instruments.

Unlisted Shares are so famous because there is a lack of credible information to analyze a private company. Therefore, institutional investors generally opt for the indirect route of Unlisted Shares to save themselves from making uninformed and substandard investment decisions. Unlisted Share firms manage these with access to the data worth considering while analyzing privately owned companies.

• Strategizing Investments

Like a mutual fund's Asset Management Company, which focuses on managing different mutual funds, we have Private Equity firms (PE Firms) whose focus is deciding how to use (strategize) the PE funds to invest in several privately held companies across the globe.

In addition, 99% of Unlisted Shares are typically held by Limited Partners (LPs), and the other 1% is for General Partners (GPs). The latter is actively involved in executing strategies related to PE funds.

To be crystal clear, Unlisted Shares should be distinct from venture and growth capital.

Venture Capital (VC) focuses on early-stage startups with substantial growth potential, whereas Growth Capital (GC) invests in more mature, high-growth companies. The common thread is that VC, GC, and PE all invest in securities of privately held companies, differing only in the stages of these companies' life cycles they target.

In essence, PE firms, VC firms, GC firms, and angel investors are distinct entities within Unlisted Shares investments.

• Now, why invest in Unlisted Shares?

Private companies have fewer avenues for raising substantial money than public companies, which can raise capital from the masses. However, investments in Unlisted Shares have solved this issue. Their sole purpose is to provide working capital to targeted privately held companies for expansionary and new product development or to restructure the entire company.

• What are the different strategies Private Equity firms use to make Unlisted Shares?

1.     Leveraged Buyouts

2.     Venture capital

3.     Growth capital

4.     Distressed investments

5.     Mezzanine capital

Now that you have settled down with a good portion of the basics, it's time to divulge information on something that blew my mind, to be honest.

Yes! That is the Unlisted Share Market. It exists.

So, what happens in an Unlisted share market? By default, many readers think it is a marketplace for trading equity shares of several private companies. 

But it is different from what it looks like!

The Unlisted Share Market isn't a place for trading equity shares of private companies; it's a platform facilitating the exchange of 'committed capital' between different Unlisted Shares and other Alternative Shares.

• You have a leading question about 'committed capital,' right?

I have an answer, as at Precize, we breathe Unlisted share!

Tracing back to the track. Committed capital is the amount investors have pledged/promised to contribute for creating a pool of funds, known as 'pre-existing investors commitments.'

• What's behind the existence of committed capital?

Committed capital exists to serve the purpose of inducing at least some amount of liquidity in this illiquid, unlisted Share market. It's like if your Unlisted Share funds have got their hands on a certain amount of committed capital, the fund is deemed to have adequate resources to finance its purpose, as discussed earlier.

Committed capital is mainly used for acquisitions and some allocation towards specific investments or for creating general-purpose serving blind pools where the contributors aren't aware of its uses. 

Now that you're acquainted with the nuances of the Unlisted Share market, we'll draw parallels between global developments and the Indian Unlisted Share market in another segment of this article. Until then, stay tuned!