Investing in Private Equity

2017, 30 Nov | In M & A for Entreprenuers

Investing in Private Equity

If one ponders the historical data in reference to private equity investing one can comprehend why investors consider it to be a worthwhile venture. When juxtaposed to other investment types (Nasdaq and the S&P 500), private equity offers the best return. In some circumstances, the return associated with private equity is nearly double that of Nasdaq or the S&P 500.

With that type of ROI, one can understand why the number of private equity investments (and total dollar amount invested) has increased each year, despite the crisis of 2008.  However, investing in private equity isn’t an easy endeavor for many investors. This avenue has long been associated with institutions and wealthy individuals (universities, pension plans, etc.), particularly since a large number of private equity firms work only with investors who have the means and interest of committing as much as $25 million. Although many firms drop their minimums to $250,000, this requirement obviously prohibits a large number of interested investors.

There are specific types of private equity funds worth considering. A fund of funds facilitates investors in reducing the minimum investment required and the level of associated risk. Moreover, minimal investments can still range between $100,000 to $250,000 and investors without a net worth between $1.5 million and $5 million may be excluded.

A fund of funds holds onto the shares of private partnerships investing in private equities. They possess the ability to invest in hundreds of companies encompassing a variety of sectors which represents diversification.

Private-Equity Exchange – Traded Fund (ETF) is a viable option that doesn’t require any minimum investment requirement as you buy individual shares of an ETF over the stock exchange. ETFs add additional management expense which one is likely not have to address with direct private equity investments. One may be assessed a brokerage fee every time shares are bought or sold.

Special – Purpose Acquisition Companies (SPAC) is an additional option one must invest in publicly traded shell companies that make private-equity investments in a private company.  Please note that these SPACs can be a risky venture. They often only invest in one company which significantly reduces diversification. Additionally, Furthermore, they may be stifled by investment deadlines, as dictated by their IPO statements, requiring them to make an investment without committing the necessary due diligence.

While one has multiple options for private – equity investing, each comes with its own inherent expenses and potential risks. Compared to mutual funds, one might find the fees of private equity investments to be exponentially higher.  Of course, these fees can have an impact on returns. There are private – equity investments that have lower minimum investment requirements. Often these investments have small histories to use when attempting to compare to other investments, leaving the risk of the unknown.

When considering a private equity investment, be prepared to commit your money for at least 10 years as this allows adequate time for companies to work through the acquisition phase and commence a profitable cycle. With an investment between 2 to 5% of one’s investment portfolio in private equity, one can facilitate minimalizing the overall risk on a portfolio and may benefit from a big return in the long run.

Through sufficient preparation and research, one may increase the rate of success in a M&A investment.