London Daily

Focus on the big picture.
Wednesday, Mar 29, 2023

What is private equity? It's like a private investing club, where you buy a piece of non-public companies

What is private equity? It's like a private investing club, where you buy a piece of non-public companies

When you hear the words private equity, a few things probably come to mind: palatial estates, sleek suits, private islands, and, well, money. Lots of it. But if you're among those who think only characters from "Billions" or other billionaires can be involved in the world of private equity (PE), it's time to think again.

Mere millionaires can be involved too. Or those with even less.

Private equity investments are called "private" because they involve buying shares or an ownership stake in private companies or funds, rather than ones traded publicly on the stock market.

Adding private equity to your portfolio opens up a broad new world of investment opportunities that can offer above-average returns. Here's what you need to know before getting started with private equity investing.


What is private equity?


Investing in private equity is a little like dining at a private, members-only club, as opposed to eating in a restaurant that's open to the public.

At its core, private equity consists of investment opportunities in companies or business ventures that are not available on any of the open, public financial markets. They don't have shares that trade daily on a stock exchange, like the Nasdaq or New York Stock Exchange.

Unlike publicly traded stocks or mutual funds and ETFs, private equity funds are not regulated by the Securities and Exchange Commission (SEC), which means they are typically more appropriate for knowledgeable and experienced investors.


How does private equity investing work?


Investing in private equity ventures done through private funds, run by private equity firms with specific investment strategies and areas of expertise.

The vast majority of investors in a private equity fund are known as limited partners (LPs): They simply put up the capital, receiving an ownership stake or shares in the fund in return. In contrast, the fund's general partners (GPs) are responsible for managing and executing the fund's investments. They own a smaller percentage of the shares, too.

In essence, private equity funds gather large sums of money from investors who are in it for the long haul. This money is used to restructure or revamp a struggling company, fund acquisitions and start-ups, or take a company public.

Private equity often requires long investment holding periods, because it takes a while before projects like turning around a troubled firm or launching an initial public offering (IPO) can garner positive returns. The average lifespan of a private equity fund is about 10 years.

At the end of the period, investors get their money back, plus hefty (hopefully) profits raised from sales and IPOs. In certain cases, like that of a real estate limited partnership, investors may also earn regular income along the way, but most of the return is paid at the end.


Who should consider private equity investing?


Private equity funds are out of reach for many investors because they tend to have substantial minimum contribution requirements.

How substantial? Let's put it this way: Some private equity funds will allow you to buy in for as little as $250,000. Others have capital contribution requirements that reach up into the millions.

Many private equity funds are only available to institutional and accredited investors, who are thought to be more experienced and thus able to take on the risk of investing in securities not regulated by the SEC. An accredited investor is one with a net worth exceeding $1 million who's earned an income above $200,000 — or $300,000 if filing jointly — for the past two years.


What are the main types of private equity investments?


Private equity investments take a variety of shapes.


Distressed funding


Distressed funding deals with struggling businesses that have filed for Chapter 11 bankruptcy, allowing them to seek help by agreeing to restructure their business model and create a repayment plan for their debts. In some cases, private equity firms intend to help these businesses by changing up the management and turning the business around. In other cases, it's more about selling the business's assets for a profit.


Leveraged buyouts


A leveraged buyout also involves buying a struggling business, but this time, the goal is for the business to improve its model before being sold for a profit, or issuing an IPO. This type of buyout is the most common form of private equity investment and is often handled by buyout specialists.


Venture capital


Venture capital investing involves offering start-up or early-stage funding for entrepreneurs aiming to ramp up their businesses. It can include providing Series A funding, which is aimed at helping the business optimize its user base and product offerings after demonstrating clear potential.


Specialized Limited Partnerships


Some private equity firms set up funds that invest in specific types of assets. Real estate is especially popular for these funds. Specifically, they often invest in commercial spaces, or in multifamily structures like apartment buildings. Other private equity funds invest in infrastructure projects like bridges and roadways.


Cheaper ways to invest in private equity


Although traditional private equity is only open to high-net-worth or accredited investors, some forms of PE are more democratic — they don't require six figures to play. Here, in rough order of sophistication and means required:

*  Angel investing: Angel investors are seasoned entrepreneurs or well-off professionals who put money into start-ups and younger businesses in exchange for part-ownership. Often this is real seed money, for firms too young or small for venture capitalists. Angel investors' stake averages around $75,000.

* Equity crowdfunding: Like other crowdfunding models, equity crowdfunding involves a company or private business using an online platform to raise money from numerous individuals. However, instead of just getting a gift or a cool product, as with regular rewards crowdfunding, private equity crowdfunders actually get part ownership in the business. Additionally, equity crowdfunding's pooled structure means that minimum contribution requirements can be as low as $2,000 or as high as $100,000 — it depends on the investor's income. As an added bonus, these platforms are subject to SEC regulation.

*  Fund of funds: A fund of funds is a pooled investment fund that invests in other funds, especially high-end mutual funds and hedge funds. They're priced similarly to mutual funds and usually come with minimum investing thresholds of around $1,000.
Private equity ETFs: There's an exchange-traded fund (ETF) for everything these days. A private equity ETF primarily invests in private companies. They're offered by investment companies that sponsor ETFs, like Invesco (the Invesco Global Listed Private Equity Portfolio) or ProShares (the ProShares Global Listed Private Equity Portfolio), to name two popular ones. With these publicly traded funds, you can buy any number of shares you want, usually.

What are the pros and cons of private equity investing?


Like any other type of investment, private equity investing comes with a distinct set of advantages and disadvantages.


The upsides of private equity


*  Private equity offers the potential for substantial returns. Part of the general partner's art is identifying promising companies to invest in, which can be grown and sold off, or taken public, for a big profit.

*  For the limited partner, private equity funds are real set-it-and-forget-it investments — the GP does all the work. Perfect for the passive investment crowd.

The downsides of private equity


*  Private equity funds carry a lot of fees. Since these investments are unregulated, there's no limit to the amount that private equity firms can charge. Performance fees are paid to the general partners/fund managers for producing positive returns, and the "2 and 20" annual fee structure is common: a firm charges an annual management fee of 2% of the assets being managed and a 20% performance fee on profits generated.

*  Private equity investments are illiquid. Private equity firms often require investors to keep their money in the fund for at least three to five years.

*  Private equity investments can be high-risk. The companies are untried or troubled, and they may not live up to their potential.

The bottom line


While private equity investing is certainly not for everyone, for those with the capital, it can be a fairly easy way to achieve higher-than-normal returns.

That said, before you decide to go this route, you'll want to do your research on the fund itself, its accompanying fees, and the success of its previous investments. Unfortunately, this information can often be difficult to find, since unregulated funds are not required to share information as readily as public investment funds, like master limited partnerships, mutual funds, or real estate investment trusts (REITs).

That's one reason why private equity investments traditionally have been the realm of institutional investors and sophisticated accredited investors.

But some of the newer private equity investment options, like equity crowdfunding and private equity ETFs, allow investors of smaller means to play — and get in on a promising start-up long before it gets discovered by the public market.

Newsletter

Related Articles

London Daily
Close
0:00
0:00
Elon Musk and Others Call for Pause on A.I., Citing ‘Profound Risks to Society’
You're Beautiful - James Blunt (Boyce Avenue acoustic cover)
Nashville style execution
You Are So Beautiful
“We've had evidence prior to the pandemic that masks were largely ineffective at preventing community transmission of influenza “
Postmodern Jukebox European Tour Version
Former Starbucks CEO Howard Schultz:
An old French tune (by Georges Brassens) Pomplamoose ft. John Schroeder
Former Starbucks CEO Howard Schultz rejects being labeled a "billionaire"
Sattahip Motor Show 20
Jamie Dimon is being deposed over JPMorgan Chase role in Epstein lawsuits
SONATE AU CLAIR DE LUNE - Moonlight sonata
This is how an electric car saves all the energy that he would have spent if he had lived 50 years longer.
A kiss to build a dream on
Brand new security footage has just been released to the public showing the Active shooter Audrey Elizabeth Hale drove to Covenant Church School in her Honda Fit this morning, parked, and shot her way into the building
Wiz Khalifa - See You Again ft. Charlie Puth, Furious
Social Media censoring users for saying the true
Wonderful Tonight - Eric Clapton (Boyce Avenue acoustic cover)
Smart Iranian fashion designer teaching dummy TV anchors lesson about reality
Mean Blues
AMERICA, 2023
La Chansonnette
U.S. charges FTX's Bankman-Fried with paying $40 million bribe
Pattaya Addicts
Fallen 'Crypto King' Who Owes Millions to Investors Was Kidnapped and Tortured
Franz Liszt - Liebestraum - Love Dream
Regulators blame social media for SVB's rapid collapse: 'Complete game changer'
Dream a little dream of me
AOC explains why she opposes banning TikTok
Tu Vuo' Fa' L'Americano - Hetty & the Jazzato Band
UK: Humza Yousaf replaces Nicola Sturgeon as SNP leader and first minister in Scotland
Unchained Melody sung like you've NEVER heard!
In a dramatic U-turn against His Government: Judicial Reform Legislation Must Be Halted, Says Israeli Defense Minister Yoav Gallant
Dave Brubeck - Take Five
Gordon Moore, a co-founder of Intel Corporation, died at 94
Édith Piaf - Non, Je Ne Regrette Rien (Sofie)
Powell: Silicon Valley Bank was an 'outlier'
Rondo Alla Turca
Bordeaux town hall set on fire in France pro democracy protest
Kiss of fire
Police violence in Paris
Ed Sheeran - Perfect (Amadeus violin cover instrumental)
Paris: Some of the police are stepping down and showing solidarity with the protesters.
Tom Jones - I´ll Never Fall In Love Again 1967, 1989, 2001
Donald Trump arrested – Twitter goes wild with doctored pictures
Israel Cachao López - Guajira Clásica
NYPD is setting up barricades outside Manhattan Criminal Court ahead of Trump arrest.
Edward Maya - Stereo Love (feat. Vika Jigulina) (Extended Mix)
Credit Suisse's Scandalous History Resulted in an Obvious Collapse - It's time for regulators who fail to do their job to be held accountable and serve as an example by being behind bars.
Strauss - Radetzky March - Karajan
Home Secretary Suella Braverman tours potential migrant housing in Rwanda as asylum deal remains mired in legal challenges
La vie en rose
Goldman Sachs cuts outlook for European bank debt over Credit Suisse crisis
Despacito (Piano Cover) - Peter Bence
Paris Rioting vs Macron anti democratic law
The Temptations - My Girl (Smokey Robinson Tribute) 2006 Kennedy Cent
'Sexual Fantasy' Assignment At US School Outrages Parents
Orlando Cachaito Lopez Redencion
Orbán Viktor: the restructuring of the power relations in the whole of Europe is taking place
Edith Piaf - NON, JE NE REGRETTE RIEN
Credit Suisse to borrow $54 billion from Swiss central bank
RADETZKY MARCH-2008-Wien, New Year Concert
The BBC problem about China
Only you (And you alone)
Strikes-Hit UK Pledges 94 Billion Euros In Cost-Of-Living Budget
Beautiful in White x Canon in D (Piano Cover by Riyandi Kusuma)
Russian Hackers Preparing New Cyber Assault Against Ukraine
Strangers In The Night
"Will Fly Wherever International Law Allows": US Warns Russia After Drone Incident
Charles Aznavour - La Boheme
UK face biggest fall in spending power for 70 years
Summer time
Jeremy Hunt insists his Budget will get young parents and over-50s back into work
Sting and Stevie Wonder - Fragile (from Sting's 60th birthday concert)
If this was in Tehran, Moscow or Hong Kong
Aux Champs Elysees
Announcing GPT-4
Stand By Me - Ben E. King (Boyce Avenue acoustic cover)
TRUMP: "Standing before you today, I am the only candidate who can make this promise: I will prevent World War III."
La Mer (Beyond the Sea) – Avalon Jazz Band
Drew Barrymore
She
China is calling out the US, UK, and Australia on their submarine pact, claiming they are going further down a dangerous road
Nathalie Song by Enzo Petrachi Stjepan Hauser Cello
A brief banking situation report
Shape of My Heart - Sting (Boyce Avenue acoustic cover)
We are witnessing widespread bank fails and the president just gave a 5 min speech then walked off camera.
Radiohead - Creep
Donald Trump's asked by Tucker Carlson question on if the U.S. should support regime change in Russia?.
Quizás,Quizás,Quizás - Andrea Bocelli - Jennifer Lopez
'No relation to the American SVB': India's SVC Bank acts to calm depositors amid brand name confusion.
Perhaps, Perhaps, Perhaps - Multi-Couples
Good news: The U.S. government is now guaranteeing all deposits, held by, Silicon Valley Bank, and the funds are available as of today
Pentatonix Havana
Silicon Valley Bank exec was Lehman Brothers CFO
Paula Cole - Autumn Leaves
In a potential last-ditch effort, HSBC is considering a rescue deal to save Silicon Valley Bank UK from insolvency
Oscar Benton Bensonhurst Blues
Saudi Arabia has announced a major breakthrough in diplomacy with Iran after two years of intense talks
OH NANANA vs ABUSADAMENTE
Nina Simone - ”I Put A Spell On You”. Vezi aici cum cântă Jeremy Ragsd
NIGHTWISH - The Phantom Of The Opera
Motorshow 2016 Tanjay Negros Oriental
Monica Bellucci - Ti Amo
Michael Jackson - Billie Jean Milena The Voice France 2018
Michael Buble (Help Me Make It Through The Night) feat Loren Allred
Memories Canon In D - Maroon 5 (Boyce Avenue piano acoustic cover)
Matteo Simoni - Marina
Maroon 5 - One More Night
Maroon 5 - Memories
Mark Knopfler - Brothers In Arms (Berlin 2007 Live)
Mark Knopfler & Emmylou Harris - Romeo And Juliet (Real Live Roadrunni
Marina, Marina - The LUCKY DUCKIES intimist live concert at Guimarães
Major Lazer & DJ Snake – Lean On Mauranne The Voice France 2016
Love Theme from Romeo and Juliet - Joslin - Henri Mancini, Nino Rota
LoLa & Hauser - Love Story
Linkin Park Jay-Z - Numb Encore (Live 8 2005)
Hallelujah Mennel Ibtissem, The Voice France Leonard Cohen
Leonard Cohen - Dance Me to the End of Love
Leonard Cohen & Natasha Rostova - Dance me to the end of love
La casa de papel - Bella Ciao
La Camisa Negra
L'italiano (Toto Cutugno) - The Gypsy Queens
Juanes - La Camisa Negra
Jonathan and Charlotte - Britain's Got Talent 2012 Live Semi Final - U
John Powell - Assassin's Tango
Joe Cocker - You Can Leave Your Hat On (LIVE in Dortmund)
Joe Cocker - Unchain My Heart 2002 Live
Joe Cocker - A Whiter Shade Of Pale
Jay Z & Alicia Keys - Empire State of Mind LIVE
Jason Mraz - Im Yours (live)
Jarrod Radnich - Bohemian Rhapsody - Virtuosic Piano Solo
James Blunt - You're Beautiful
James Blunt - You're Beautiful & Bonfire Heart (Live at The Nobel Peac)
If You Go Away - Helen Merrill & Stan Getz (Tribute to Virna Lisi)
I'LL BE MISSING YOU
I Say a Little Prayer
Hotel California ( Eagles ) 1994 Live
Historia de un amor - Luz Casal. Vezi interpretarea Biancăi Sumanariu
Here Comes The Sun - The Beatles (Boyce Avenue acoustic cover) on Spot
Heart - Stairway to Heaven Led Zeppelin - Kennedy Center Honors
HAVANA by Camila Cabello Zumba Pre Cooldown TML Crew Kramer Pastra
HAUSER and Señorita - I Will Always Love You
HAUSER - Waka Waka
HAUSER - Sway
HAUSER - Lambada
HAUSER - Historia de un Amor
HAUSER - Despacito
Great Pretender
Georgia May Foote & Giovanni Pernice Samba to 'Volare' - Strictly Come
Gary Moore - Still Got The Blues
GIPSY KINGS VOLARE Penelope Cruz
Fugees - Killing Me Softly With His Song
French Latino - Historia de un Amor
For A Few Dollars More The Danish National Symphony Orchestra (Live)
Flashdance • What a Feeling • Irene Cara
Filip Rudan - “Someone You Loved” Audicija 4 The Voice Hrvatska Sez
Eric Clapton - Wonderful Tonight
Enya - Only Time
Enrique Iglesias - Bailando (English Version) ft. Sean Paul
Enrique Iglesias - Bailamos
Elena Yerevan Historia de un amor
Ed Sheeran - Shape of You (Official Music Video)
Ed Sheeran - Perfect Symphony [with Andrea Bocelli]
Ed Sheeran - Perfect (Official Music Video)
Easy On Me - Adele (Boyce Avenue 90’s style piano acoustic cover) on S
ERA - Ameno
ELENA YEREVAN- Cancion Del Mariachi-IN STUDIO-2017 DPR
Dust In The Wind - Kansas (Boyce Avenue acoustic cover)
Don't Let Me Be Misunderstood
Despacito x Shape Of You - Pentatonix
Deep Purple - Child In Time - Live (1970)
David Foster When A Man Loves A WomanIt's A Mans World (SealMichael Bo
Dance me to the end of Love ( Pi-Air Design )
Coolio - Gangsta's Paradise (feat. L.V.) [Official Music Video]
Conquest Of Paradise (Vangelis), played on Böhm Emporio organ
Cielito Lindo
Chico & The Gypsies - Bamboleo
Canción Del Mariachi - Antonio Banderas, Los Lobos • Desperado
Camila Cabello - Havana (Audio) ft. Young Thug
Camila Cabello - Havana ( cover by J.Fla )
California Dreamin' - The Mamas & The Papas José Feliciano (Boyce Ave
Buster Benton - Money Is The Name of The Game
Hallelujah Pentatonix
Bobby McFerrin - Don't Worry Be Happy (Official Music Video)
Bob Dylan - Knockin' On Heaven's Door Emilia The Voice Kids France
Besame Mucho - Cesaria Evora
Ben E. King - Stand by Me Sax Cover Alexandra Ilieva Thomann
Bella Ciao
Bella Ciao - INSTRUMENTAL
Beautiful in White x Canon in D (Piano Cover by Riyandi Kusuma)
Bad Romance - Vintage 1920's Gatsby Style Lady Gaga Cover ft. Ariana Savalas & Sarah Reich(1)
BELLA CIAO 2020 - KARAOKE ITALIANO
BAMBOLEO - Gipsy Kings • Antonio Banderas, Katya Virshilas
BAILANDO (original)
Awesome Ukrainian yodeler - SOFIA SHKIDCHENKO (with English subtitles)
Avicii - The Nights
Atom - The Great Gig in the Sky
Aretha Franklin - (You Make Me Feel Like) A Natural Woman (Official Ly
Antonio Banderas - Cancion del Mariachi (Desperado)
André Rieu - Zorba's Dance (Sirtaki)
André Rieu - Can't Help Falling In Love
André Rieu & Mirusia - Ave Maria
Andrew Reyes Elton John - Don't Let The Sun Go Down The Voice 2020 (
Andreas Kümmert Whiter Shade Of Pale The Voice of Germany 2013 Showd
And I Love You So
All About That Bass - Postmodern Jukebox European Tour Version
Alan Walker - Faded (Piano Cover)
Ain't No Sunshine -- Bill Withers (cover by Canen 12 y.o.)
African music
Adriana Vidović - “Creep” Audicija 4 The Voice Hrvatska Sezona 3
Adriana Vidović - “Believer” Nokaut 3 The Voice Hrvatska Sezona 3
A Fistful of Dollars - The Danish National Symphony Orchestra and Tuva
4 Beautiful Soundtracks Relaxing Piano [10min]
2CELLOS - Whole Lotta Love vs. Beethoven 5th Symphony [OFFICIAL VIDEO]
2CELLOS - Smooth Criminal (Live at Suntory Hall, Tokyo)
2CELLOS - Smells Like Teen Spirit [Live at Sydney Opera House]
2CELLOS - Despacito [OFFICIAL VIDEO]
13 Year Old Girl Playing Il Silenzio (The Silence) - André Rieu
094.All About That Bass
00 - SADNESS PART 1
(Ghost) Riders In the Sky (American Outlaws Live at Nassau Coliseum, 1
(Everything I Do) I Do It For You - Bryan Adams (Boyce Avenue ft. Conn
What a wonderful world
Moon river
×