What is private equity?
Private equity investing refers to equity investments in companies that aren’t publicly listed or traded on a stock market.
Private equity is often a way for high-net-worth individuals and institutions to invest. These are usually limited partnerships. They are managed by general partners who raise capital from investors and then invest with these limited partners. They then invest in portfolio companies and have a high level of involvement in their management.
- Greater chances of achieving greater results
Private equity investments have seen a significant increase in the past few decades due to their potential return enhancement. In fact, historically speaking, private equity has outperformed publicly traded equities.
Companies are staying private longer due to the increased capital available to them in the private equity sector. Companies that go public are generally more mature and less likely to grow in the future.
Imagine being able buy shares in Facebook and Uber before they went public. This is an example of the type of growth private equity investors may see if they invest the right funds.
Investors are now looking for private equity to gain access to companies earlier in their lives.
- Risk protection
Private equity can help improve risk management, which is a benefit that is often overlooked.
In order to improve risk management, private equity investments can be added to a portfolio with publicly traded investments.
- Private equity investments are not affected by the stock market’s movements
Stock market investments are often tied to market volatility and fluctuations. Large-scale market trends can be triggered by both domestic and global economic events.
Private equity investments have the advantage of being less affected by market and economic trends. Private equity investments are tied to company performance and metrics. They are not affected by market swings.
- Potential for income generation
The average fund investment’s life span is about 10 years, from the date of capital commitment until final distributions. As with other investments in the public market, committed capital is not immediately used. Cash must be available to invest in portfolio companies as they are identified and their growth strategies implemented. Distributions will occur over the lifetime of the investment and can vary in their timing and magnitude.
A systematically designed private capital portfolio that is regularly and consistently diversified should result in a steady series of cash flows and liquidity events for investors. Private credit and real assets can accelerate cash flows.
- Accessing entrepreneurs
A solid track record and good management are important factors in determining the business’ potential success. Entrepreneurial vision is the most important thing. Many of today’s most successful companies wouldn’t exist without entrepreneurial vision and drive.
Investors who buy stock in publicly traded companies are often not investing in entrepreneurial vision or talent. Instead, they buy equity in established companies.
Private equity investments offer investors the opportunity to invest in entrepreneurs’ visions and access capital. These investments can yield higher returns if they are chosen carefully.
This outperformance can often be attributed to operational improvements, active ownership and more direct corporate governance.
- Influence on company decisions
Private equity investments offer another benefit: the ability to influence company decisions. Publicly traded stock investors are often not able to influence the internal workings of the companies in which they invest.
Private companies offer investors the opportunity to influence key decisions. Investors will most likely be able to give direct input. Private equity investors will also control the financial goals and strategic direction of the company.
Private equity investors can increase their input to help protect their investments and grow their capital.
Execution is key to successful private equity investing. This means that you must start with a well-diversified private equity portfolio and then implement a private equity investment program.
To build a portfolio of private equity that meets investor’s risk and return objectives, it is necessary to hire a wealth management firm that has access to and knowledge about a wide range of private equity investment options.
