What is Private Equity?
Private equity is a form of alternative investing in which capital is pooled from investors to acquire companies, generally non-publicly traded, with the intention of building, upgrading or growing the business. Private equity firms make money for investors by increasing the value of their investments over time. Depending on their objectives, private equity firms may also seek to boost a company’s market share, product mix or operating efficiency.
Private equity firms will often bring in management expertise, strategic advice and other resources to companies they own in order to maximize investment returns. By taking a company private they make it less susceptible to the whims of daily market moves and can compensate for lack of management know-how or strategic direction.
Private equity investing is highly active, and typically involves a number of different strategies to pursue investment goals, such as leveraged buyouts (LBOs) and venture capital investments. Investors have the potential to achieve strong returns over time, although there is a greater risk of illiquidity, volatility and capital loss.
The Benefits of Private Equity
One of the primary benefits of private equity investing is the ability to make investments in companies that are not publicly traded. Because private equity firms are not subject to the same restrictions as publicly traded companies, investors do not have to worry about market fluctuations that often affect publicly traded stocks.
Additionally, private equity firms are able to acquire companies at a discounted rate as they can purchase a large percentage of the company’s shares without sacrificing current market prices. This generally provides investors with higher returns than if the same percentage of stock had been bought directly from the stock market.
Private equity firms also have extensive networks and contacts which can provide added benefits such as improved marketing capabilities or exposure to new markets. By gaining access to these resources, investors can make well-informed decisions and maximize their returns over time.
The Risks of Private Equity
Private equity investments often involve considerable risk and illiquidity as companies being acquired are typically not listed on a public exchange. As a result, investors can be exposed to considerable volatility and lack of liquidity as markets can drastically change in a very short amount of time.
Furthermore, private equity investments usually involve substantial fees which can erode the total investment return. Fees such as management fees, due diligence and transaction fees can offset any gains a private equity fund may make.
Finally, private equity investments are often illiquid, meaning that investors may not be able to realize a gain or loss in their investment for an extended period of time.
Conclusion
Private equity can open up a world of opportunities for investors, though it is not without its risks. As with other alternative investments, investors should be sure to thoroughly understand the nature, structure and operating strategies of the private equity entity they are considering before investing. With careful research, private equity can be an effective tool for generating returns and long-term wealth.