Being an investor is probably very familiar with stocks. But for most financial experts, would recommend diversifying your investments into alternative investments such as private equity. Investing in alternative assets acts as a risk hedge that helps investors achieve a balanced portfolio.
A private equity investment is an investment in a privately held company as opposed to a public company. But there is a lot more to know about private equity before investing in this alternative asset class. Explore all things private equity investing in this private equity investing guide.
Private Equity - What is it?
Private equity is a type of alternative investment that uses funds not invested in private companies. In other words, private equity is money that is not traded on a public exchange.
Institutional and individual investors pool their funds to invest directly in privately held companies or participate in acquisitions of publicly traded companies. In the latter case, the company is usually removed from the stock exchange (delisting of shares).
Benefits of Private Equity
For companies, private equity can help in the following ways:
A convenient solution for raising capital without applying for a loan or listing your company.
With qualified private her equity her manager, the company can focus more on overall growth.
This entails operational changes to support the company's growth.
For investors; both individual clients and institutional investors, private equity:
It offers the opportunity to earn high returns as you can invest in the company early on before it has grown to a stage where it is ready to go public.
Opportunity to invest in private companies with great potential, such as Elon Musk's business ventures such as SpaceX and Neuralink.
Freedom from the long list of conditions and restrictions of trading on the public market.
Offers financing and tax advantages.
Things to aware
From a business perspective:
In contrast to public equity, there may be limited number of potential investors, making it difficult to raise funds.
Private equity investments may affect the business and administrative structure of the private company.
Private equity invested often demand majority stake, which may result in loss of ownership stake. From an investor's perspective:
Information about private equity investments is difficult to access and there is no specific channel for getting the latest market information. Opportunities and updates are constantly distributed between specific stakeholders and market players for specific deals.
Private equity investments are long-term investments. Liquidation can take 5-10 years. Not all investors wait that long.
It often involves a large minimum investment and can require large sums of money in the millions of US dollars.
Before get it started
Before you start investing in private equity firms, there are a few things to consider.
Non-liquidity
Private equity is not the best choice for investors with short-term goals. Private equity investment horizons are typically five to ten years or longer. This means that investors have to wait a long time before liquidating their investments. Trading in private equity on the secondary market is also partially possible. Fees and costs (H3)
Fees and expenses associated with private equity investments tend to be higher than those associated with public equity. High fees result from the active management of the system. Private equity delegates the management of investments to experienced individuals to ensure that the objective of making a profit is achieved.
Fees and expenses incurred when investing are contained in a document called an offer. Offers typically include details of the contract and terms governing the investment.
Conflict of interest (H3)
Private Equity firms often have conflicting interests with the funds it manages and, in turn, the Limited his partners who invest in the funds.