There is a subtle difference between investors owning shares of a company, where their ownership exposure is limited, and a buyout, which refers to investors owning the majority of the stakes. Since you own part of the shares, your control of the company is restricted as an investor. Contrarily, in a buyout, the majority of the shares, approximately more than 50%, allows you to participate in the company’s decision-making. Therefore, examining India’s mid-market buyout boom suggests that HNIs are acquiring the majority of stakes in medium-sized companies to gain control and access.
Private Equity funds play an essential role here. They are not publicly traded stocks and are available to High-net-worth individuals (HNIs) and institutional investors. In these private equity (PE) funds, HNIs invest, funds conduct buyouts, and finally, investors receive returns, without directly managing the company. However, PEs funds observe the mid-sized companies’ compatibility and stability. Here are the excerpts of it.
- HNIs invest in private equity funds.
- Private equity researches a suitable company with growth potential or operational improvements.
- Private equity then invests the pooled capital from different HNIs in the mid-sized company, thus buying a majority of the stakes and ownership.
- HNIs expect significant profits as the company scales up.
Now the question is, why is India experiencing a surge in Mid-Market Buyout?
One of the main reasons is that private equity is growing stronger, with robust economic growth. Shift in a family-owned business due to succession issues. For HNIs, this represents a transition from traditional investments such as publicly traded stocks, bonds, mutual funds, and fixed deposits to higher-return, though less liquid, alternative asset classes.
What’s driving the buyout surge
- Different sectors: Domestic consolidation among mid‑sized companies in sectors such as healthcare, consumer, technology, financial services and infrastructure drives buyout activity.
- Growth supporters: The growth is supported by India’s formalising economy, faster adoption of digital technologies, and expansion of the consumer base.
- Change in family-owned business: Many family-owned businesses are selling a part of the company’s share to private investors, thus encouraging buyouts.
- Valuation Advantage: Mid-market offers more reasonable valuations compared to large-cap. With India’s overall market expensiveness, mid-sized companies are priced more reasonably, offering potential return.
- Private loans: Private credit deals, structured as AIF-II funds, are drawing interest from HNIs and family offices as a reliable source of returns, with total investments marking around $9 billion in the first half of 2025.
- Alternative investment funds (AIFs): Regulatory changes and the rise of SEBI-regulated AIFs have made it easier for HNIs to invest in this framework.
- GIFT City: GIFT City (Gujarat International Finance Tec-City) is allowing HNIs and other ultra-HNIs to invest in private equity and buyout funds through its International Financial Services Centre (IFSC) framework, rather than SEBI. It provides a regulated, tax-efficient, and US Dollar-denominated environment for Indian residents and Non-Resident Indians (NRIs) to participate in Alternative Investment Funds (AIFs) that target private equity and buyout.
- Governance: Buyout firms are working to improve how companies are managed by moving away from short-term financial strategies and focusing on building strong, efficient, and lasting businesses.
What HNIs should know?
- Historical buyout exits in India have reflected a strong performance, with studies implying an average return of around 2.8× for sponsor-to-sponsor sales and up to 5.1× for IPOs. Hence, it demonstrates that mid-market buyouts in India can deliver strong returns. Through this, HNIs can also compare potential private equity returns with other investment options, such as stocks, bonds, and real estate, and assess risks.
- HNIs usually invest 10-25% of their private equity in buyouts, based on their risk appetite, financial goals, and investment horizon.
- Buyouts often act as a hedge against the volatile stock market.
- One of the key factors to be considered is active management. Unlike passive stock investing, buyouts have a longer lock-in period (5 to 7+ years) and require active monitoring of the fund manager’s strategy.
Challenges or risks
- Buyout investment return comes with a waiting period of 5 to 7 years. Buyout investments are illiquid; investors are limited to withdrawing for 7 years.
- Though more stable than large-cap stocks, high-growth, high-demand sectors can still carry valuation risks.
- After October 2024, the implementation of the new tax regulation has shifted the tax burden for share buybacks to shareholders, reducing the returns from buybacks for HNIs compared to earlier.
- By monitoring indicators like GDP growth, which is projected 6.5% to 7%, inflation, and corporate earnings, HNIs can time their entries.
To conclude, Baron Capitale, a financial firm help access deals, provides due diligence, guides tax and regulatory compliance, and manages investments based on investors’ risk profiles and financial objectives. Our advisors analyse the economic health of the company, operations, and market, helping you understand potential risks and returns, and whether investing in it can yield profits or not, thereby minimising risks.
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