Private Equity Above And Beyond Part (2)

Bonjour, fams! I am so glad that you all followed up. And those of you who have directly landed here will want to look at the last part of this write-up. So, before you ask, what do we have as nourishment for your brain today? I’ll introduce you to some facts. 

Did you know? 

World Wide Waiter pioneered the world’s first-ever online food delivery service in northern California in 1995. When did it start in India? Astoundingly, we never had an online food delivery infrastructure till 2015. Next, when was the first smartphone built? IBM built the world’s first smartphone in 1992 and made it commercially available in 1994. When did the smartphone frenzy arrive in India? We got our first smartphone in 2009 from HTC. 

Lastly, when was the internet invented? 1983! And when did we get our access? 1995!

Let’s draw parallels between developments in the Unlisted Shares market at a global level and its growth in India. 

Also, an article published by Paulina Likos, a former risk manager on the U.S. News & World Report, dated September 29, 2021, says that “For the past 15 years, Unlisted Shares posted stronger annualized returns at 14%, than public equity metrics such as the S&P 500, Russell 3000, and MSCI World, which posted 9.3%, 10%, and 7.2% returns, respectively”.

Similar is the Indian Unlisted Share market scenario, as the Unlisted Share capital has crossed the mark of $232.4 billion in 2020, as per a report published by E&Y. 

In addition, according to an article published by Livemint on March 30, 2021, 

“In the past three years, fundraising by Indian firms in the Unlisted Share market averaged $34.5 billion, more than double the $15.1 billion raised on average in the public markets.” 

But there are entry barriers! 

The channel of Unlisted Shares has always dominated investments in private equity. Still, there are high entry barriers, irrespective of being staged at a global or domestic. 

1. Lack of avenue.

2. Lack of information on the strategy of investing in Unlisted Shares. 

3. Lock-in period for portfolio holdings (6 months in the US and Indian markets).

4. Lack of liquidity. 

5. High entry minimum investment amount. The minimum investable amount in any alternative fund in India is INR 1 Crore. At the global level, it ranges from $25 million to as low as $250,000. 

Have any steps been taken to increase retail investors’ participation in investments of Unlisted Shares? 

The proactive steps taken by the U.S. government to open this market for retail investors have been significantly mentioned in an information letter from the U.S. Department of Labor. The letter explicitly talks about an investment vehicle known as the ‘Target-Dated-Fund.’

What are Target-Dated-Funds? 

Target-Dated-Fund is a type of lifecycle fund that follows two different approaches throughout its existence. 

Stage 1: Aggressive approach 

This approach is followed when an investor is young, considered an age suitable for taking on high-risk investments in the financial world. Therefore, the fund invests heavily in equity securities and comparatively less in debt. 

Example: If you are 20 years old and have invested in a Target-Dated-Fund, then your investment portfolio will be composed of 80% equity and 20% debt securities according to the formula;

Equity Portion investment = (100 - Age of an investor)

Debt Portion investment = Age of an investor 

Stage 2: Conservative Approach

This approach is followed when an investor is nearing retirement. The investment division is more inclined towards debt securities as it is considered a relatively safer investment avenue than equity securities. 

Example: If you are 55 years old and you have been invested in a Target-Dated-Fund since you were in your 20s, the composition of your investment portfolio will have changed from 80% in equity to (100 - 55 = 45) 45% in equity and from 20% in debt securities to 55% in it. 

Target dated fund is not just a US thing. We also have one investment instrument, the National Pension Scheme (NPS). 

How is NPS comparable to a Target Dated Fund?   

India’s Pension Fund Regulatory and Development Authority (PFRDA) introduced a new feature in 2016, adding an attractive lifecycle fund attribute to NPS.  

Following this, an investor can opt for the;

1. Aggressive Lifecycle Fund - Equity exposure is allowed up to 75% to 35 years. 

2. Conservative Lifecycle Fund - Equity exposure is allowed up to 25% only. 

NPS has a defined purpose of creating and safeguarding the created wealth for retirement by opting for an aggressive and conservative approach to investing toward the retirement age. In addition, 60% of your money in NPS enjoys the status of (Exempt-Exempt-Exempt) on maturity. 

How are they being used to increase retail investors’ participation in Unlisted Shares? 

It’s simple! The U.S. regulators plan to allow Target-Dated-Funds to invest more of their assets under management in Unlisted Shares when the fund follows an aggressive approach. 

The thing is that earlier, investment in Unlisted Shares was deemed risky due to the need for more ease of transactions and the availability of credible information for analysis of private companies. The perception of Unlisted Shares hasn’t changed by leaps and bounds, but there has been a change in enticing people to consider them a wealth-creation catalyst. 

Why are we considering investing in Unlisted Shares now? 

PRIVATE EQUITY HAS AN IMPRESSIVE TRACK RECORD OUTPERFORMING PUBLIC EQUITY 

MSCI World used for the PME 

This is evident from the above analysis of performance between unlisted shares and listed shares. Linking back to the last mention about India not being innovative enough, many of you would have come up with an argument centered around how late we got our independence and how it affected our growth. I agree that we always needed a clear and level playing field pre-independence. However, we have one now! The Indian Unlisted Share market has immense potential, and it’s just waiting to be unlocked. And with ‘ Precize,’ 

Precize, it’s time to mark our profiles with a leader’s tag in the Unlisted Share market ecosystem.