Most of us have only heard about equity and debt investment where you can earn a fair amount of return. AIFs come after these two where you can earn a huge profit with high risk and here the invested amount size is also huge that’s why most of us don’t search about this way of investing. AIFs are categorized under 3 section.
- Category 1 – This includes venture capital funds, SME funds, social venture funds, Infrastructure fund, Angel fund and etc.
- Category 2 – Funds include private equity funds, real estate fund, funds for distressed assets etc.
- Category 3 – Hedge funds, PIPE funds, etc. fall into this category.
But for this ecosystem, basically we only need to focus on 3 funds PE, VC, and Angel fund. So, as we go along the journey you hear about these funds most of the time from us because we try to evaluate a startup and the news only through the aspects of these funds, as they play a vital role in this ecosystem. So let’s dig deep into these funds.
So what is PE fund?
These are formed by the group accredited investor and qualified clients include institutional investors, club together in the form of a Limited partner (LP) that own a majority of the fund while the General Partner (GP) own a minor one let’s say less than 3%. They invest for majority stakes says more than 50% in a mature companies operating in the traditional industries. They are also referred to as the bigger sharks who are always in search of smaller fishes to acquire them so they keep on looking business that is deteriorating because of inefficiencies but their B-plan is too good otherwise there is no use to buy a worthless company.
The next one is venture capital.
They are the real-power house of this ecosystem as to run a startup you need a lot of money and for this VCs comes in the picture. Institutional investor, HNI or Ultra HNI individual, who are willing to take risk refers to as Limited Partner (LP), comes together to form a Venture capital fund, managed by the General Partner (GP), to share their resources and mentor startups in exchange for the minority stakes in the early stage startup and a sizable gain after the exit. They form a firm, known as a Venture capital firm and also has a particular set of parameter refers to as an investment thesis, so collectively and accordingly they take investment decisions and invest in an early-stage startup.
Finally, the Angel Fund
They come into the picture at a very early stage to invest in startup typically in the form of equity investing and generally not wanting a controlling right only do advice. The deep-pocketed experienced individual or investor, institutional and retail investor, refers to as Angels, as the name suggests, form a fund to invest in very early stage or in new business to earn meteoric growth in the equity acquired, in exchange for a huge risk.
Who are the General partner (GP) and limited partner (LP)?
General Partners – They are the key drivers of the management company and are responsible to raise and oversee VC fund, set and make investment decisions and help their portfolio companies exit since they have a fiduciary obligation to their Limited Partners.
Limited Partners – The main power sources, the real money guys who commit capital into the VC fund as you cannot run a fund without money. The mostly are institutional investors such as pension funds, foundations, family office, High Net worth Individuals (HNI), Insurance companies, etc.